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6 ways to get the most out of the RSI indicator

 The RSI indicator is commonly used to determine overbought and oversold market levels. The indicator provides a relatively high analysis accuracy even in a standard use case. Let's take a look at 6 ways to use RSI that will further improve the indicator's accuracy.

The first, traditional way is to buy an option at the moment when the RSI exits the overbought / oversold zone.


When the value of the RSI line falls below the oversold level (usually 30%), the strength of the bears weaken, which means that the indicator exits this zone - it's time to open an upward position.

When the value rises above the overbought level (usually 70%), you need to consider options for entering a decline.

It is imperative to buy an option only when the indicator exits the overbought / oversold zone.


RSI on small timeframes

Method 2. If you trade turbo options and binary options with expiration times less than 30 minutes, then levels 70 and 30 do not always allow you to make accurate entries. The period needs to be reduced so that the indicator often reaches its extreme values. For timeframes less than an hour, you can use the RSI period of 5 and levels 90 and 10, or even 95 and 5.


An example of setting the RSI to levels 90/10 and period 5:


Method 3. For additional confirmation, you need to pay attention to the higher period to see the global trend. Trading binary options against the trend is a bad idea, so the direction of the signal on the current timeframe and one higher should be the same.


This is the confirmation of signals on a 1-minute chart with signals on a 5-minute chart:

At the same time, the period and RSI levels on both charts must match.


Method 4. There is a scalping technique for ultra-short trades. This trading method is often used by American traders. The essence of the strategy is to receive a large number of signals in a short period of time. The main task is to minimize the indicator response time.


The settings are as follows:


RSI period is 2 bars;

overbought boundaries are also set to the maximum possible - 99 for overbought, and 1 for oversold.

Typically, this strategy is used on the M1 or M5 chart. The expiration period of a binary option usually does not exceed 5 minutes.

Divergence

Method 5 - searching for divergences on the chart - an effective method for obtaining RSI signals. Divergence is a discrepancy between the readings of a chart and an indicator, for example, when the chart draws a higher high and the indicator shows a lower high.


An example of divergence - on the chart, two highs are at the same level, and on the indicator chart, the second high is noticeably higher:

All types of divergences are shown in the diagram below. The main thing to remember is that you need to trust the readings of the indicator, if it grows, we buy the CALL option, if it goes down - PUT.


Example of entering a position based on RSI divergence:


RSI + Bolinger Bands

The last, sixth way is to combine RSI indicators and Bollinger bands, because the first one shows impulsive movements, and the second - the general direction of movement in the market. As a result, we get very accurate signals to enter a position.


The RSI trading rules are quite standard, we buy the PUT option when leaving the overbought zone, the CALL option when the indicator line exits the oversold zone. But, we enter only when the price is near the lower line of the Bollinger Bands, which will act as a filter. Ideally, the price should just cross the line at the moment the RSI signal is received.


PUT signal: the price crosses the upper channel line - the opening price of the candle is higher, the closing price is lower (inside the channel). The screenshot below shows an ideal situation when the price enters the channel synchronously with the RSI exit from the overbought zone:


In case of a Call signal, the opening price of the breakout candle should be below the line, the closing price should be higher:


The expiration time can vary depending on the timeframe used. Ideally, the expiration time should be equal to the number of bars to reach the moving average (middle line of the channel) from the edges of the channel. You can calculate the average number of bars required for the price to travel the distance from one border to another and divide this value by 2.


The most famous and common indicators can form the basis for a profitable trading strategy if used correctly. We have looked at several simple ways to increase the success rate of the traditional RSI strategy. Try these techniques on a free demo account.


Traditional indicators have already become so integrated into the life of traders that many simply do not perceive them as a serious trading tool. At the same time, most of the more recent developments are based on the same RSI or moving averages. The main advantage of RSI is its versatility, the indicator can be used with equal success on currency pairs, stocks or commodities, without losing the quality of signals.



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