Using RSI To Trade Binary Options

Using RSI To Trade Binary Options

The relative strength index (RSI) created by J. Welles Wilder is a momentum indicator that can be used to measure overbought and oversold conditions for a security. By evaluating the current price of a security relative to the past 14-closing prices, an analyst can determine if the price of the security is relatively high or low compared to the recent distribution of prices.

The RSI generates an index by creating a formula that computes the index that creates a value between zero and 100.

RSI = 100 – 100 / ( 1 + RS )
RS = Average Gain / Average Loss

The default for the relative strength index is 14-units, which includes any time period such as daily, weekly, monthly or intra-day.

The RSI is mainly used as an overbought and oversold indicator. Again the default for the RSI creates an overbought condition when the index moves above a reading of 70, and generates an oversold condition when the index moves below a 30 print.

Intra-day price points are generally more volatile over 14-periods than daily or weekly points which make the RSI a solid tool to use for picking overbought and oversold levels. Recent overbought and oversold readings are shown with the red arrows. Last week the Euro moved into overbought territory and quickly reversed, and then moved into oversold territory as reflected by the RSI and quickly reversed. A strategy that could be employed on an hourly basis could be to purchase a Binary Options call when the RSI prints below 30 and to purchase a Binary Option Put when the RSI prints above the 70 level. The default levels of 30 and 70, as well as hourly data can be played with to come up with a system that fits an investor’s comfort level but regardless of the levels used, the RSI is a robust technical indicator that can be used to trade the Binary Options market on a mean reverting basis. This Style of graph analysis and using proven strategical thinking to trade binary options, are extremely beneficial to both novice and experienced traders, and are all available to users who open an account with Magnum Options and take advantage of their unique and free 1 on 1 trading education program with industry experts.

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Note: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.

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