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» » Relative Strength Indicator (RSI) for Trading

Relative Strength Indicator (RSI) for Trading

9-05-2018, 17:22 358 Education

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What is the Relative Strength Indicator (RSI) for trading ?

Our most successful IQ Option traders have noted that the indicator that continually makes capital gains is the RSI. The relative strength index or the RSI is a momentum oscillator used to measure the velocity and magnitude of directional price movements. The indicator provides the investors with sell or buy signals when the asset is overbought or oversold respectively.

Example-1: A typical looking RSI indicator

So how what does that all mean to me ?

The RSI changes from 0 to 100% and can be presented by a single fluctuating line. The closer this line gets to the zero mark the higher are the chances that the asset is oversold. The price, in this case, can be expected to go up. When the RSI gets close to 100%, the asset is likely to be overbought. According to the indicator, the asset price will, therefore, fall soon.

How to use RSI indicator in trading?

As noted above, the RSI oscillates between 0 and 100%. Traditionally the RSI is considered overbought when above 70% and oversold when below 30%. If the indicator provides a lot of false alarms it is advised to increase the overbought threshold to 80 and decrease the oversold threshold to 20.

Example-2: See exactly when to buy or sell - using the Standard approach – 70/30

So lets break it down into the 4 common components:

2 Solid Call Indicators:

Call Indicator-1: RSI (yellow line) cuts the 30% band (red horizontal line) from below with upward momentum. This is a HUGE opportunity to place an immediate "Call" option.
Call Indicator-2: RSI (yellow line) cuts the 70% band (green horizontal line) from below with vertical momentum. This is a HUGE opportunity to place an immediate "Call" option.

2 Solid Put Indicators:

Put Indicator-1: RSI (yellow line) cuts the 30% band (red horizontal line) from above with downward momentum. This is a HUGE opportunity to place an immediate "Put" option.

Put Indicator-2: RSI (yellow line) cuts the 70% band (green horizontal line) from above with downward momentum. This is a HUGE opportunity to place an immediate "Put" option.

How do I setup my IQ Option indicators
Step:1
Select your indicator time frame of 1-minute

Step:2
Select your chart type: Candlesticks
Step:3
Select the RSI indicator

Step:4
Configure your RSI settings.
Please note 3 settings strategies exist:

Turbo Options timeframes less than 30 minutes:
If you trade turbo options or binaries with expiration time less than 30minutes, 70 and 30 levels don't always allow you to execute accurate enterings. Period should be decreased for indicator to reach its extreme values more frequent. For timeframe less than hour one may use an RSI period of 5 and 90 (overbought) to 10 (oversold) or even 95 to 5 levels.

Standard approach – 70/30:
The period of 14, oversold level 30% and overbought level 70% are used in the standard approach. This is the most frequently used preset for this indicator. Traders expect the RSI to bounce from 30 and 70 threshold lines. With standard parameters it will happen quite often, but it won’t always mean the actual change in the trend direction is coming.

Conservative approach – 80/20:
The period of 21, oversold level 20% and overbought level 80% are advised by the conservative approach advocates. Risk-averse investors set up the indicator in a way that will make the RSI less sensitive and therefore minimise the number of incorrect signals. More extreme high and low levels — 90 and 10 — occur less frequently but indicate stronger momentum.


Conclusion

RSI is an extremely accurate indicator. However once you are comfortable with the RSI, you may look at combining it with Bollinger Bands.

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