Advanced RSI Binary Options Trading Strategy

Screen Shot 2014-06-17 at 11.12.19

 

Video Transcription:

Hello, traders. Welcome to Daytrading Binary Options. In this lesson we’re
going to go through advanced RSI trading.

You’re going to see that the RSI is an excellent indicator for day trading,
because only using this indicator and normal support and resistance levels,
you can actually take a lot of trades and have a lot of good setups and
high probability setups, actually. So let’s go.

What is the RSI? The RSI stands for relative strength index. This is a
momentum indicator that measures the speed and change of price movements.
The RSI oscillates between 0 and 100, and because it compares the magnitude
of recent gains versus recent losses, it can determine overbought and
oversold conditions in the market for any financial asset.

The RSI is considered overbought when it’s above 70 and it’s considered
oversold when it’s below 30. Overbought and oversold conditions help us
determine extremes and turning points in the market. This means that when
the RSI indicates overbought condition, this means that we have reached an
unsustainable level in the market and we are due for a correction.

The same applies with oversold conditions, and we’re going to see the
actual setups later in this lesson.

The RSI also helps us determine the general trend. This is actually a very
good use of the RSI, because sometimes, even though we are in an uptrend,
we can actually be in just a correction of a much larger downtrend. By
using the RSI, we can actually spot these differences in the market and
actually trade with the trend or look for the exact market extremes and
trade the correct direction.

When the indicator oscillates between 50 and 100, it can be used as a
confirmation of a bull market. When the RSI oscillates between 50 and 0, we
are in a bear market.

Let’s see how we identify the trend with the RSI. We already said that when
the RSI oscillates above 50, we are in a bull market and when it oscillates
below 50, we are actually in a bear market.

Let’s have a look at two examples so you can better understand what we were
saying, okay?

Now this is GBP-Aussie dollar four-hour chart. As you can see, we are in a
clear up move after we made this low right here. We continue to make higher
lows and higher highs until we peaked at this turning point. Okay?

As you can see, the RSI was oscillating between 50 and 100. 100 is the
extreme all the way up here. The first line is the 70 level. We have the 50
level, which divides the bull and the bear country. Then we have over here
the 30 level, and all the way down here, the zero level. This is the RSI,
okay?

As you can see here, when we started the uptrend, we crossed over above the
50 level. Then after every little correction, we didn’t go below the 50
level. We just found support here and continued to the upside, then
oscillate between the 50 and the 70. Here we almost get to the 80, 85
level. Then again, okay?

When the RSI is doing this and you have price moving up, you can actually
say that we are in a bull market.

The RSI here is above 50, and you can see that we are in a clear up trend
on the chart.

Let’s see an example of a bear market identification with the RSI. Here we
are in a clear downtrend. The RSI is oscillating below 50. You can see that
clearly here, that once we started this aggressive move down at this peak
right here, the RSI crossed below the 50 level and never went up again. It
just oscillated below the 50 level. This means that we are in a bear
market.

If we are oscillating below the 50 level, we are not going to try to buy
calls on, in this case, the GPB/Aussie. In this case, also the GPB/Aussie,
but in this case we are not going to try to buy puts, because we are
oscillating above the 50 level. Remember, if we are above the 50 level, we
are in a bull market. And in a bull market, we are looking to buy calls.

If we are oscillating below the 50 level, we are in a bear market. In a
bear market, we are looking to buy puts. Okay?

We are only counter trend trading when we actually have the overbought
signal and the oversold signal.

Let’s start with the overbought signal. An overbought signal is a bearish
signal. Price has achieved a high that is not sustainable any more, and we
are due for a correction. The overbought and oversold signals come after
strong moves either to the upside, where people are starting to buy and buy
and buy. Then the market is overbought.

When we a strong move to the down side, is when traders are starting to
sell the asset. Then when the other traders see that the price of the asset
is coming down, they sell it, too, until there are no more sellers and the
market is oversold.

But now we are with the overbought signal, so that means that we have had a
massive, an aggressive buying pressure, that has pushed price to a level
that is not sustainable any more. This is what the RSI is telling us when
we have the overbought signal.

Here’s an example of a bearish or buy put setup, with the overbought
signal. Now this is, again, a GBP/Aussie four-hour chart.

As you can see here, we have an extreme move to the upside. We have a steep
move to the upside. You can see that we broke with this triangle formation
right here. Then we moved all the way up here.

Now you can see that we have achieved what we can call an extreme in the
market when actually we have a couple of candles that are just in a very
choppy range at the top of the up move. This is called a turning point.

Then you go to the RSI and you can see that the RSI is above the 70 level.
This means that we are in an overbought condition in the market, and we are
due for a correction.

When we actually take out this low, I mean this area of support and this
low right here, we have a signal to buy puts. Remember that when the
turning point is all the way up here at the top of a steep up move. Then
the RSI must come down below the 70 level. And ultimately cross to bear
country for us to be able to buy puts on a very non-aggressive matter or on
a very non-aggressive way.

Because if we buy puts at the top of the move, just because we are in an
overbought condition, our option can actually expire out of the money,
because you need to understand that in a very strong up move, the RSI can
stay overbought for a long period of time.

This means that sometimes maybe the RSI just will pull back to the 70 and
move back up if the bullish pressure is too big.

We need for us to have a signal to buy puts on the overbought signal; one,
we have to have a turning point. Two, we have to have the RSI on an
overbought level. Three, we must clear the previous lows. Four, the RSI
must move below the 70 level and ultimately below the 50 level to bear
country.

Now let’s go to the oversold signal, which is the opposite of the
overbought signal. In this case, the oversold signal is a bullish signal.
Price has achieved a low that is not sustainable any more. We are due for a
correction.

This is the same thing. In a very aggressive down move, this happens
because we have a very strong selling pressure on the market. At the end of
this aggressive sale pressure, the market of the asset is in an oversold
condition. When the RSI is in oversold conditions, it is most likely that
we will have a turning point right there.

But remember that we need to use previous support and resistance levels to
get the actual turning point. We need to use the oversold and overbought
conditions on the RSI, with historic support and resistance, but this you
already know. We are going to go through a couple of examples on the MT4
platform, so you better understand what we’re talking about. But in the
meantime, let me show you an example of a bullish setup with the oversold
signal. Okay?

Now this is again the GBP/Aussie four-hour chart. As you can see, we are in
a very aggressive down move. We have moved down from this level to below
the 1.800 level. So yes, this is a very aggressive down move.

No, no. You can see that we have achieved a turning point. A turning point
in the market can be when you see actually that the candles start to not be
as aggressively red as before. You can actually see that one or two things
are happening. We are in a very strong support level and we are finding a
lot of buyers right here, or two, the traders that were short from up here
are just taking profit at a support level.

In any case, you need to use these levels in confluence with an oversold
signal on the RSI. Here you can see that the RSI is way below the 30 level.
When we take out the previous high, we have a signal to buy calls in this
case, because we are in an oversold signal or an oversold setup.

Now remember that we need the RSI to go above 30 and ultimately above 50
for us to have a true trend change or change in the trend. Because what you
need to understand that if we are in a very aggressive down move, and we
have achieved a turning point.

In this case, the RSI goes above 30, but if it fails to go above 50, we can
be trapped just in a correction of the down move. In any case, let’s
imagine that this is the 15 minute chart. We have achieved this turning
point. We already had our historic support and resistance levels. In this
case, support, of course, and we see that we have a very strong buying
pressure building up at this level.

We see that the RSI crosses above 30 and we take out the previous high
right here. In this case, we can buy calls, because we are just trading the
oversold signal. We are not trading the trend. We are not swing trading. We
are just trading the move to the upside or the correction.

Let’s imagine that this is a 15 minute chart. If we are analyzing price
action in the 15 minute chart, you need to choose an hourly expiration
option. In this case, 1, 2, 3, 4, we would have expired in the money on
this setup.

There you go. This is the overbought and oversold setups or signals. As you
can see, they are very easy to spot, but you need to use them in
confluences with historic support and resistance, because on this historic
support and resistance is where you will find buyers and sellers. And if
this confluences with an oversold or overbought signal of the RSI, it is
very likely that you will have a setup just like the ones we just saw on
the slides.

But in any case, we’re going to go through a couple of charts after the
actual lesson on the MT4 platform, so you can see how I find these spots to
trade binary options.

The first setup we’re going to go through or the second setups we’re going
to go through are divergences. And we’ll start with a bearish divergence.

A bearish divergence occurs at the top of an up move. You already know
this. It’s when the RSI is making lower highs and prices making higher
highs. This means that price is diverging from the RSI readings.

This is clearly simple. You already know this, but you need to understand
it again, for the RSI.

Here’s an example of a bearish divergence, where we’re going to look for
opportunities to buy puts. Here’s the GBP/USD daily chart. As you can see,
up until this high, we were in a very nice up move. These are daily
candles, so this is a three month up move to this high. Prices making
higher highs.

We go to the RSI and we can see that the high that price made here is the
high that the RSI made here, right here at the 70 level. When the price
made a higher high, the RSI actually made a lower high. This is what we
call divergence. At the top of an up move, it’s a bearish divergence. It’s
a bearish divergence, because we have signals to buy puts. Okay?

The actual signal occurs when we take out the previous low. Because we are
in an up move, we need to break structure for us to be able to buy puts.
When we break structure is when we actually break with this low, because
when we break with this low, we are making lower lows. So we are no longer
in an uptrend when we are actually making higher lows.

So when we break this low, we have here a very nice signal to buy puts on a
bearish divergence setup. Here’s the breakout trigger for an excellent move
down.

Here you see bearish divergences. We actually caught the move at the top of
it. So if we are trading on the longer time frame or the longer term, we
would actually end up in the money whether we are swing trading or if we
are day trading and this is actually a one hour chart, we would have ended
up in the money, too, if we would have been trading end of day expirations
for day traders.

So this is basically what a bearish divergence is.

Let’s go through what bullish divergences are. Bullish divergences occur at
the bottom of a down move. The RSI is making higher lows and the price is
making lower lows.

Let’s go through an example. It’s pretty easy. Here you can see that on the
daily GBP/USD, we are in a very nice down move, even though we made a very
deep correction to this high right here, we continue to make lower lows.

Now, you can see that here at this bottom, price made a lower low right
here. And the RSI was making higher lows. So this is what we call a
divergence. But the actual setup is not ready yet. The actual setup occurs
when we have the breakout trigger. When we breakout with the previous high
and when we do so, we have here a trigger or a signal to buy calls.

Remember that divergences are not enough for us to get in the market,
because that is too aggressive. You need to wait for the actual breakout
trigger for you to be able to buy binary options on any currency pair or
instrument that you are trading.

The third type of setups that we are going to learn here are positive and
negative reversals. Positive and negative reversals are the actual opposite
of bearish and bullish divergences. Let’s see why.

A positive reversal is a bullish signal. The RSI is making lower lows and
not at oversold, but between 30 and 50. They can be a little bit below 30,
but you need to understand that these are not divergences. Well, these are
divergences, but they are not extreme divergences as we just saw on the
previous slides.

Now the RSI is making lower lows and prices making higher lows, so a
positive reversal occurs at the end of a down move. Of course, you are
looking at something like this.

Actually, a positive reversal can also be considered as a continuation
divergence. Sometimes it occurs when prices making the correction in the
middle of an up move.

But let’s have a look at what you need to look for. Here, you can see that
price is making higher highs. I mean, higher lows, I’m sorry. And the RSI
is actually making lower lows. This is what we call a positive divergence.

As you can see here, we come from this down, this low right here, we made
this high. We made our higher low. A higher high. And another higher low.
So we are actually in an uptrend. So this can be considered as a
continuation pattern or continuation divergence.

Prices making higher lows and the RSI is making lower lows. When we break
with the previous high, which is this one, right here, we had the breakout
trigger and the signal to buy calls on this currency pair, in this case the
GBP/USD one hour chart. If we are trading the one hour chart, we should be
okay with trading the end of day expiration options, which would have
expired in the money in this case.

The last setup we are going to learn is called negative reversal. A
negative reversal is a bearish signal. This occurs when the RSI is making
lower highs and not quite at overbought, but between 50 and 70. Price is
making higher highs.

Let’s go through an example. Right here you can see that price is making
higher highs. And the RSI is making lower highs. Because price is making
higher highs and the RSI is making lower highs, we have a negative
reversal, which is a bearish signal. We will look for a trigger to buy puts
in this case.

When we break with the previous low, in this case, this one right here, but
here we tested it again. We broke it all the way here. When we break with
this low, we have a breakout trigger and a signal to buy puts in this
currency pair. Again, since we are analyzing the one hour chart, we should
be trading the end of day expiration options, which would have expired in
the money in this case.

If you are trading the 15 minute chart, you may choose an hour to two
hours, an hourly to a two hour expiration option, because you want to give
your trade a little bit of air to breathe or space to breathe, okay? Or
some time to move in your favor. But I mean, if you’re analyzing on the 15
minute charts, you don’t want to trade the end of day expiration options,
because that is just way too high of an expiration for such a low time
frame to be analyzing on.

In any case, this is the negative reversal. Again, we’re going to go
through a couple of charts on the MT4 platform in a little bit.

Now, let’s have a look to how to trade with the RSI and the basic rules.
Here are the general rules.

The overbought and oversold signals have to be used with previous lows and
highs as triggers. In a steep up move, the RSI can stay overbought for long
periods of time. Remember.

In an aggressive down move, the RSI can stay oversold for a long period of
time. So you need to be careful with that and with practice, you will learn
how to spot these aggressive up and down moves and how to avoid to be
caught in a false setup, in a false signal.

When spotting turning points, you must always use support and resistance
levels as rejection zones. Remember that having a divergence or having a
turning point with an overbought signal is just not enough. You need to use
historic support and resistance, because you need to know where the buyers
are going to be placing their market or the sellers, too, if you are
looking to buy puts.

In any case, you need to use these levels, because without them, it will be
very hard for you to profitably trade with the RSI.

Here are the trading rules. If you are analyzing the 15 minute chart,
choose an hourly to a two hour expiration option. If you are day trading,
analyze price action on the hourly and choose an end of day expiration
option. The setups are the same for any timeframe and any asset.

Right now, we’re going to go to the MT4 platform.

Welcome back, and here’s my MT4 platform. As you can see, I have a lot of
charts tiled up in here, but we’re going to focus on these four or five
charts right here, which are the major currency pairs.

Let’s start with the euro/US dollar four hour chart. Here’s a naked chart
of the Euro/US dollar. To add an indicator, you already know, you go here.
And you go to “trend,” and you choose the relative…no, I’m sorry. Go to
“oscillator” and you choose the “relative strength index.”

The default setting is a 14 period RSI. I’m going to show you the
difference between the 14 period RSI and, let’s say, a five period RSI. The
only difference is that the RSI is going to react quicker to price and we
have more spikes if you choose a lower period for it. Okay?

We are fine using the 14 period RSI for our trading.

What you need to understand here is that once you plug the RSI, you need to
draw your historic levels. Right here we have this low, that got broken,
tested here, broken, and well, we chopped around it before we broke to the
down side after we broke out of this triangle. Okay? This is a triangle
formation. Just trust me.

All right. As you can see here, the first thing you need to understand here
or you need to see or you need to look for is this. After this step down
move, when we broke with this up structure, we have here the breakout or
when the RSI moved below the 50 level. And we continue to trade below the
50 level, all right. If we are trading below the 50 level, we are in a bear
market, exactly.

Even though we have some kind of correction here, you can actually see that
we are not looking to buy calls any place. We are actually looking for a
spot for us to continue or to trade to the downside.

Here with the RSI, we don’t have any clear setups on the Euro/US dollar,
because as I already told you, we are not in an aggressive move, just like
this one, that gave us an opportunity to buy calls in a correction, because
the RSI never moved above the 30 level. It continued on an oversold
condition until we achieved this area of support that then we broke. We
broke to the upside, but we continued to trade or the RSI continued to
oscillate below the 50 level, so we don’t have any clear setups on the
Euro/US dollar.

Let’s go to the US dollar/Canadian dollar. Let’s try the 15 minute chart,
okay? There you go. Here’s the 15 minute chart on the US dollar/Canadian
dollar. As you can see what happened here, let me just get rid of the
expansion on the trend line. On my MT4, and you can see that here, we have
higher highs on price and here we have lower highs on the RSI. When we
break with this level right here, we have actually a signal to buy puts on
the US dollar/Canadian dollar.

The thing is that right now, it’s 4:30 in the afternoon. There’s no
sessions open. There is low liquidity in the market. That’s why you can see
that we are chopping and we are moving in a very choppy and tight, tight
range.

Here, even though we had divergence, it’s not a good sign to buy puts or to
be trading at all.

What you need to understand is this, okay? We are looking for volatility
and we are looking for momentum. If we go further back, you can actually
see that we might find some good RSI divergence or just [topping] setups.

Right here you can see that the RSI actually…this is what we call a mild
divergence, because the price is not making higher highs, but we have
actually some kind of a double top. Just check this out, okay? We came from
this low and we moved up, all the way up to this high.

And when we moved to this high, the RSI made this high right here. Right
above 70. Then we continued to the downside and we tested again. This same
area of resistance. And the RSI made a clear down, lower high, I’m sorry.

When we see these we can actually see that we have a mild divergence. This
is a mild divergence because even though we didn’t make a higher high, we
have a divergence with the RSI reading.

When we cross and we take out this low, you can see that we are in a clear
option, because we are making higher lows and higher lows. When we break
with this low right here, and of course, with the up structure and the RSI
after the divergence moves below 50, we have a clear signal right here to
buy puts for an hourly expiration that would have [expired in] the money.

This is how you actually look for divergences with the RSI. We didn’t even
have to use historic support and resistance. We only used this previous
spike highs that were held right here for our trade.

Basically this is how you do it. If you want, we can go through another
chart. This time we’re going to go through the hourly, New Zealand
dollar/US dollar chart. Let’s go and let’s put on a 14 period RSI on our
chart.

Okay, so let’s start with the drawing levels. This is a previous low and a
previous support level right here. Okay, this is at the entire resistance
support area, I’m sorry. That was broken here and retested here.

This is where the RSI comes in handy, okay? We are making higher…we are
actually in an uptrend. So you draw your trend line right here. You can see
that it was very clearly respected before we moved up, okay? Right here we
had a spike high to these lows right here, which are now resistance,
because before they were support and the RSI shows a very overbought
signal.

But the thing about this is that when we break with these lows right here
on the hourly, of course. This is the hourly. When we break with these lows
right here, we have to wait for this candle to close. We close all the way
down here, okay, which are previous highs.

When we close all the way down here, we can see that the RSI actually held
the 50 level. So we don’t take the trade just now. We wait for another pull
up to the area of resistance. When we have a clear crest below the 50
level, when we break with this low right here, here is where we have our
signal to actually buy puts on the New Zealand dollar/US dollar.

Now let’s go through again. Let’s go again through the differences between
these two. Even though we had a very, very overbought condition or
overbought reading on the RSI, when we came down and when we had actually
the trigger or well, the breakout trigger, we saw that the RSI held the 50
level. This means that we had a lot of buyers here on this previous high.

Remember that previous highs, this high is a small resistance area. When we
break it and when we retested it, we retested it as support, so we have
buyers here. And these buyers moved price up all the way up to the
resistance zone.

When we moved again to the resistance zone, we massively broke a structure
again. And the RSI moved below the 50 level. When the RSI moved below the
50 level, we moved to bear country and we have here a signal to buy puts on
the NZD/USD.

You have to be…I mean, this is advanced RSI trading. These are not
automatic signals that you just take blindly. You need to think about where
the buyers are, where the sellers are, where are the levels that I need to
break for me to be able to buy puts or calls on these currency pairs or
whatever asset it is that you’re trading?

Just think about it. Go back and go through every RSI setting. Just here we
had a very nice, for instance, bounce of the 30 level. When we have a
bounce of the 30 level, then we cross above the 50 level, we have here,
boom, a very nice and clean signal to buy calls.

This is the kind of setup that you need to be looking for. For instance,
here we have a very nice divergence when price makes lower lows and the RSI
makes higher lows. We move above the 50. But remember that we need to break
with this high right here and with basically, when we broke with the high,
we had what we call a fake setup, even though we had the divergence and the
break above the previous high right here, you can see that we made what we
call actually an inverted pin bar, which is a signal of a rejection of the
level, so we would not take this trade.

If there are aggressive traders out there, you can actually take, buy calls
here at support on the second lower low, when the RSI is making higher
lows. But the thing about it is that if you take a trade here and you buy
calls here, you’re going to know how many time it will spend ranging here
before it moves above, before it moves up.

Actually, when you break with a previous high, you know that you will have
momentum to take price up and your option to expire in the money.

So these are the things that you need to look for and you need to practice
with the RSI.

 

Adam

More About

Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

View Posts - Visit Website

Comments are closed.