Options trading strategy for MA and RSI

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Options trading strategy for MA and RSI

The Binomo trading platform offers an assortment of the 5 most popular indicators. The choice is not very big, but it is sufficient enough to enable traders to trade on a variety of strategies. It also includes the most popular tools. This article will provide a review of a trading strategy that works with two indicators – the Moving Average and the RSI (Relative Strength Index), which will give us a confirmation signal.

A brief overview of trading instruments

The Moving Average is the main indicator, and it is widely used for technical market analysis. It is a line that, in general, repeats the movements of price formations on the chart, and at the same time it smooths out insignificant price fluctuations. As a result, the trader sees a picture showing the main trends on the market. Determining the direction of the current trend is simple and easy to see when you look at the chart. Therefore, the main value of moving averages is the capability of recognizing moments of convergence and divergence of lines with different periods, which makes it possible to predict the beginning and end of trends with high accuracy.

The RSI was developed 40 years ago, and it is a tool designed to determine the beginning and end of trends, as well as their strength. It works on the principle of oscillators. It is based on SMMA, which differs from other types of MA in its mathematical formula for calculating the smoothing constant. The scope of the indicator is very broad – it is used both by traders on short-term markets and on stock and currency exchanges.

Configuring the trading terminal

We add two indicators. First, the Moving Average with a period of 8 (all other parameters are by default). And secondly, the Relative Strength Index. We will use the RSI as a filter which will show the potential strength of the emerging trend. Therefore, we set a long period of 30. We also remove the overbought and oversold zones from the window, setting their levels to 0 and 100.

Above is an example of the correct settings of the parameters for the RSI indicator.

Signal for options “Up”

We should open a trade on an increase when the rate of price growth begins to outpace the MA. This is manifested on the chart by the candles breaking through the line from below and exiting above it. The option is acquired immediately after the closing point (not the shadow) of the growing candle is above the moving average.

The Relative Strength Index will help us distinguish a false breakdown from a growing trend. Due to its large period, it shows only real price trends that have sufficient potential. Entering the market is allowed only if the RSI line shows growth. And it should last at least 2 candles, and the more the better.

Signal for options “Down”

The basic principle of trading on the strategy is described above, so we will not repeat it. The rules for buying an option “Down” are similar: a downward candlestick must break through the moving with a period of 8, while the RSI must show a downward trend for a minimum of the last 2 candles. An example is shown in the picture below.

Trading rules for the strategy

The duration for transactions varies from 2 to 5 candles on the chart. When selecting expiration terms, you should take into account the time frame of the chart and the general volatility of the market. When trading on strongly pronounced trends, the duration of options should be reduced, and if the trend is weak, increased.

An example of real trading on the MA and RSI

For clarity, we will check the effectiveness of this strategy in the “field conditions,” so to speak, of real trading. So, open the Binomo platform and set up the chart. We set the time frame to 15 seconds and the expiration at 1 minute. The CRYPTO IDX asset is optimally suited for short-term trading. We also add the necessary set of indicators with the required parameters.

The signal is evident on the chart, so we buy the “Down” option for 60 seconds. The volume of our investment was $10, which is about 3% of our account, so we are not breaking the rules of money management.

The term expires and we get our profit. The volatility of the market is quite low, in fact it is practically flat, slightly resembling an uptrend. This is clearly seen from the Relative Strength Index – the line showed very slow growth. However, in order to successfully close the operation with a profit, one point is actually enough.

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“General Risk Warning: Binary options trading carry a high level of risk and can result in the loss of all your funds.”

Options trading strategy for MA and RSI

RSI indicator trading strategy – 5 systems

and the back test results!

Digging into the quintessential overbought oversold indicator!

The RSI indicator is a cruel mistress!

She lure’s us in with promises of easy money and trading success,

only to drain your trading account balance in a run of terrible stoploss strikes, Even thought the indicator said BUY!

The fact is;

Oscillator indicators in general, are risky and unreliable beasts.

They might look friendly and approachable at first, only to BITE your hand off just when you are most comfortable!

The RSI indicator is usually the go to oscillator for the novice trader when deciding to enter that first trade.

There is a simple, valid reason for this;

The RSI indicator is simple to read and understand

and it “APPEARS” to get great results when given the visual back-test!

( Come on, admit it, we have all done it! We take a quick glance at the RSI indicator in search of that sweet confirmation bias when we are just itching to make a trade. )

It is almost impossible to resist the siren call of a trading signal from our favorite indicator.

But approaching trading in a passive fashion like this is dangerous and will lead to the destruction of your account eventually!

In this article I will teach you how to avoid some of the major pitfalls that beset most beginner traders when it comes to the RSI indicator.

I am going to show you a few important things:

  • I am going to break down the RSI indicator so you understand it from head to toe.
  • I will explain the top 5 RSI trading strategies that we hear so much about, what they mean and how to trade using them.
  • I will back test each of those strategies against the EURCHF over a 16 month period and see how they actually performed, using a sample starting account of $1000, and a sensible stoploss strategy.

After reading this article you will Know the RSI indicator inside out,

YOU WILL BE better informed on the risks of using each of the RSI trading strategies to generate trading signals,

the next time the siren calls, you will think twice about placing that trade!

relative strength index calculation

These are the nitty gritty details on how the RSI indicator is built.

In reality your charting software will do this calculation for you, thats what technology is for!

1: Pick the base number of periods on which to base the study.

2: compare todays closing price with yesterdays.

3: add all the upward movements in points between closing prices.

4: add all the downwards movements between closing prices.

5: calculate the EMA ( exponential moving average ) of the upward and downward price movements

6: calculate the relative strength,

RS = EMA Upward Price Movements / EMA Downward Price Move ments

7: Calculate the Relative Strength Index (RSI):

RSI definition, what does it all mean for my trading?

The RSI indicator Has definitely got one up over its competing oscillator in the fact that it has fixed points extremes at 0 and 100.

Rather than the relative floating extremes of say the Momentum or Rate of change oscillators.

In that sense it does give the trader a base to work from in judging one period of market action to another.

The RSI indicator is also smoother than it’s big brothers, Because it uses the Exponential moving average, it tends to be less jumpy and more consistent.

In general the RSI is interpreted as follows;

If the indicator is below 30, then the price action is considered weak and possibly oversold.

If it is reading above 70, then the asset is after a strong uptrend and could be overbought.

Because the RSI is used as a tool to indicate extremes in price action, then the temptation is to use it to place contrarian trades,

Buying when the indicator crosses 30 to the upside means you are counting on the trend reversing and then profiting from it. The same is true for selling when the RSI crosses down below 70 and using this a sign that the market is reversing from a strong uptrend.

Life is never that simple though, and more often than not, you will find that the risk involved in this type of simplistic approach is ruinous to you account balance.

New traders tend to gravitate to the RSI when attempting to delve into analysis for the first time.

It is easy to aproach and easy to understand, it has fixed overbought and oversold levels and it tends to be correct over longer periods,

I can see why it is so attractive to all of us,

However, you cannott ignore the hugh failings of the RSI indicator in a strong trend!

It can stay at 90 for days on end,

dancing above the overbought line like it is on speed at a london rave in 1992!

This is no good to the novice trader who pressed the sell button without placing a stop!

Some of us (like myself ) can only learn the hard way!

Here are some quick lessons:

Wait for conformation before considering a trade,

The RSI can remain at extreme levels for long periods in a strong trend

Dont jump right in when you see a reading of 90, first allow the RSI line to fall back below the overbought line to at least give a stoploss level to trade off .

Watch the Centreline for trend confirmtion.

If the RSI line reaches an extreme and then returns to the centreline it is a better indication of a turning point in the trend. Waiting for this to occur can cut out those nasty impulsive trades!

It is common for technical traders to watch the centreline to show shifts in trend,

If the RSI is above 50, then it is considered a bullish uptrend, and if its below 50, then a bearish downtrend is in play.

Simple RSI strategy back test:

Over the last year of trading in EUR/CHF there has been:

5 overbought signals.

3 oversold signals.

From the conventional viewpoint, this means the trader got 5 sell signals and 3 buy signals.

Lets see how that worked out for him!

April 2020:
the RSI indicator hit the 30 line to indicate an oversold condition
The trader uses this signal as an opportunity to buy the market
this signal led to a 300 point rise without triggering a 50 point stop loss.
that’s a 300 point gain in your account!

July 2020:
the RSI indicator hit the 70 line to indicate an overbought condition.
The trader uses this signal as an opportunity to sell the market.
this signal led to a 150 point rise
the market triggered a 50 point stop loss.
that’s a 50 point loss in your account!

August 2020:
the RSI indicator hit the 70 line to indicate an overbought condition.
The trader uses this signal as an opportunity to sell the market.
this signal led to a 400 point rise in the market!

the market triggered a 50 point stop loss.
that’s a 50 point loss in your account!

January 2020:
the RSI indicator hit the 70 line to indicate an overbought condition.
The trader uses this signal as an opportunity to sell the market.
this signal led to a 150 point rise in the market!
the market triggered a 50 point stop loss.
that’s another 50 point loss in your account!

January 2020:
the RSI indicator hit the 70 line to indicate an overbought condition.
The trader uses this signal as an opportunity to sell the market.
this signal led to a 250 point rise in the market!
the market triggered a 50 point stop loss.
that’s another 50 point loss in your account!

March 2020:
the RSI indicator hit the 30 line to indicate an oversold condition.
The trader uses this signal as an opportunity to buy the market.
this signal led to a 220 point rise without triggering a 50 point stop loss.
that’s a 220 point gain in your account!

May 2020:
the RSI indicator hit the 70 line to indicate an overbought condition.
The trader uses this signal as an opportunity to sell the market.
this signal led to a 130 point rise in the market!
the market triggered a 50 point stop loss.
that’s a 50 point loss in your account!

June 2020:
the RSI indicator hit the 30 line to indicate an oversold condition.
The trader uses this signal as an opportunity to buy the market.
this signal led to a 100 point decline
while triggering a 50 point stop loss.
that’s a 50 point loss in your account!

In total the trader made 220 point gain in their trading account over 8 trades.

This was done with 2 winning trades and 6 loosing trades.

How to use rsi indicator in forex trading.

In order to get real value from the RSI indicator and take advantage of its benefits,

You need to approach it cautiously and interpret it a little deeper.

Here are a few techniques that you can use to cut out a lot of false signals.

Failure swings;

As I mentioned above,

The problem faced by every trader who uses the RSI indicator is that the market may well continue in its trend despite the fact that it hit an extreme reading,

It might even go on to leave that price level behind in the distance depending on the strength of the trend.

For this reason there came about the concept of the failure swing, in order to interpret the index better.

There is both the bearish and bullish failure swing.

A ‘bearish failure swing’ happens when the RSI enters the overbought zone at 70 and then comes back down below the 70 mark again.

In this case, a short position will be entered only after the RSI cuts down through the 70 line from the top.

The ‘bullish failure swing’ occurs when the RSI enters the oversold zone at 30 and then rallies out again and rises above the 30 line again.

The trader uses this rise above the 30 line as a trigger to go long.

Divergence:

Positive divergence happens when the price of an asset is drifting lower yet the RSI is starting to trend higher.

This could mean that the price is nearing a bottom and will probably turn up soon.

Negative divergence happens the opposite way, the price is driving higher, but the RSI has stalled and is beginning to turn lower.

When this occurs it is likely that the price will stop rising soon after. And then follow the RSI lower.

Trend confirmation:

The RSI can be useful as a tool for trend confirmation.

In a strong upward trending environment, the RSI rarely falls below 40, and will most always stick to the 50 – 80 range.

The corollary is true for a downtrend.

In this case the range will below the centreline and spike into the lower end of the indicator.

Overbought and oversold indications:

the standard settings for an overbought reading is 70 and for oversold it is 30.

this can be changed by the user to suit their own style.

I generally look for the RSI to register several extreme readings in a row before placing any great weight on the signals.

Centreline crossing:

When the RSI crosses the centreline it is a stronger signal that a trend change has happened than a simple extreme reading above or below the 70-30 lines.

When the indicator crosses the centreline to the upside, it means that the average gains are exceeding the average losses over the period.

The opposite is true for a downside cross.

When a centreline cross happens, it can be a good time to think about trade entry on a fresh pullback in price.

RSI trendline breaks:

RSI line itself can be interpreted by trendline analysis.

Its a simple trick but it is a useful analysis tool.

For example in an upward trending market,

Draw a line connecting the dips in the RSI line, if the RSI breaks this trendline to the downside it is an early indicator of an impending change.

A break of the RSI trendline often precedes a break of the price trendline on a price chart.

Relative strength index trading strategies

Compound RSI Strategies:

A compound strategy is when you use two indicators together.

It is always advised to balance the signal of one indicator against another, this will help to cut out alot of false signals

There are a few indicators that pair well with the RSI and using them together can proved better trading signals.

  • RSI, candlestick strategy,
  • RSI, MACD strategy,
  • RSI, MA Cross strategy,
  • RSI, Bollinger band strategy,

All of the above trading strategies should always be used with a risk management strategy alongside.

RSI, engulfing candlestick strategy:

In this trading strategy,

We combine the RSI indicator along with an engulfing candle stick.

This strategy will generate far less trades so you can afford to extend the stop loss position.

Only enter the market whenever the RSI gives an overbought or oversold signal which is supported by the a bullish or bearish engulfing candle.

Close the position on a solid break of the opposite RSI line.

April 2020:
The RSI indicator hit the 30 line to indicate an oversold condition
The trader uses this signal as an opportunity to buy the market

The trader waits to get an engulfing candle to confirm the signal.

after the engulfing candle occurred, the trader enters at the open of the next days trade.

this signal led to a 550 point rise without triggering a 100 point stop loss.
that’s a 550 point gain in your account!

March 2020:
The RSI indicator hit the 30 line to indicate an oversold condition
The trader uses this signal as an opportunity to buy the market

The trader waits to get an engulfing candle to confirm the signal.

after the engulfing candle occurred, the trader enters at the open of the next days trade.

this signal led to a 175 point rise without triggering a 100 point stop loss.
that’s a total gain of 725 points in your account in two trades!

that’s a solid performance by any ones standard.

RSI + MACD:

In this trading strategy,

We combine the RSI indicator with the MACD.

First, enter the market whenever the RSI gives an overbought or oversold signal which is supported by a MACD signal line crossing.

And then close the position if either indicator provides an exit signal.

April 2020:
The RSI indicator hit the 30 line to indicate an oversold condition
The trader uses this signal as an opportunity to buy the market

The trader waits for a signal line cross to confirm the signal.

after the engulfing candle occurred, the trader enters at the open of the next days trade.

this signal led to a 400 point gain without triggering a 50 point stop loss.

This combination indicator did not generate any further trades in the above time period.

RSI + MA Cross:

In this trading strategy,

We place a trade when the RSI gives an overbought or oversold signal which is supported by a crossover of the moving averages.

Close the position on an RSI divergence.

Although this trading system came close, it did not generate any signals over the 16 month time period!

I think we can count this one out as a useful trading system.

RSI Bollinger band:

In this trading strategy,

We combine the RSI indicator along with a Bollinger band squeeze.

First we wait for a Bollinger band squeeze to occur on a daily chart, the squeeze should come to within 150 points or so.

Only enter the market whenever the RSI gives an overbought or oversold failure swing.

which is supported by a tag of the bands in the same direction.

A bullish signal happens when the rsi falls below 30 and then rises above 30 again

Then a daily candle touches the upper Bollinger band.

Close the position on an RSI divergence.

Again this trading system did not give any signal over the time period. We can count out this system also!

So there you have it!

Here are the results of the above back tests of the 5 trading systems;

  • Simple RSI strategy =In total this system made 220 point gain over 8 trades,2 winning trades and 6 loosing trades.
  • RSI, candlestick strategy =In total this system made 725 point gain over 2 trades,2 winning trades and 0 loosing trades.
  • RSI, MACD strategy = In total this system made 400 point gain over 1 trades, 1 winning trade and 0 loosing trades.
  • RSI, MA Cross strategy = In total, this system made 0 trades and 0 points gained,
  • RSI, Bollinger band strategy = In total, this system made 0 trades and 0 points gained,

It is plain to see that the best system in this back test is the RSI candlestick strategy. It did not give many trading signals but, when it did, They were fantastic signals.

And think about it;

The average hedge fund makes about 20% a year, with the very real risk of loosing a whole lot! and what does the average savings account return?

The winning strategy above made about 100% ( depending on the $/pip amount / or lot size ) on your initial capital while risking about 10 – 15% on each of the two trades.

How I Trade With Only The 2-Period RSI

By Galen Woods in Trading Setups on February 21, 2020

“Even though we do not suggest using only one indicator, if one had to, the 2-period RSI would be the indicator.”

Larry Connors is an experienced trader and publisher of trading research. Together with Linda Raschke, he wrote the book, Street Smarts, which is a solid collection of trading strategies including the Holy Grail.

What is so fantastic about the 2-period Relative Strength Index (RSI) that a well-regarded trader like Larry Connors would suggest it as “the one” indicator?

Trading Rules – 2-Period RSI Strategy

Coupling an oscillator with a trend indicator is the usual approach.

For instance, Connors recommended the 200-period moving average, and StockChart.com did just that in their RSI2 examples.

However, I added a twist to this fast oscillator. Let’s do away with a separate trend indicator, and let the 2-period RSI clue us in on the trend. I always enjoy putting less on my charts.

The 2-period RSI (like the 2-period ADX) is extremely sensitive. We expect the 2-period RSI will give many overbought signals during an uptrend. Of course, most of these overbought signals will fail because the 2-period RSI is not meant for locating significant reversals.

So, when an overbought 2-period RSI actually succeeds in pushing the market down, we know that a downtrend has begun.

Apply the same logic to oversold RSI signals in bear trends to alert us to the beginning of bull trends.

Long Setup

  1. 2-period RSI falls below 5
  2. Price breaks above the higher swing high that formed just before the RSI signal (confirmation of bull trend)
  3. 2-period RSI drops below 5 again
  4. Buy on break of the high of a bullish bar

Short Setup

  1. 2-period RSI goes above 95
  2. Price breaks below the lower swing low that formed just before the RSI signal (confirmation of bear trend)
  3. 2-period RSI rises above 95 again
  4. Buy on break of the low of a bearish bar

To sum up, we look for two RSI signals. The first one to show us the trend, and the next one to show us trade.

2-Period RSI Trading Examples

Winning Trade – RSI Oversold

This chart shows the daily prices of FDX. The lower panel shows the 2-period RSI indicator with overbought and oversold levels set at 95 and 5 respectively.

  1. The RSI dropped below 5. That was our signal to look for the last higher high. We marked it with the dotted line and observed it.
  2. Price moved up and broke the resistance level. The 2-period RSI oversold signal was credible. Although we did not take this oversold signal, its success confirmed that the market is now in an upward trend. Time to look for a tradeable signal.
  3. The next 2-period RSI signal came quickly as it dropped below 5 again. We bought as price gapped above the bullish bar marked with a green arrow. It was an excellent long trade.

To clarify how we figure out trend changes in this strategy, I’ve marked out the RSI overbought signals that failed to push the market down in red. These failures are common in a bull trend.

However, the last overbought signal circled in black sent the market down below the previous lower swing low. The market bias has changed from bullish to bearish.

Losing Trade – RSI Overbought

This chart shows the 6J futures with 20-minute bars and a less rosy picture.

  1. The 2-period RSI rose above 95, and we started paying attention to the last major pivot low.
  2. 6J fell below the support level and confirmed a change of trend. We began looking for overbought signals for short trades.
  3. The RSI overbought signal came, and we shorted below the bearish inside bar. Price stopped out our position within an hour.

Compare the price action surrounding the first RSI signal in both examples. The quality of the first RSI signal shows us if the impending trend change is genuine.

In the winning trade, the first oversold signal was reliable, and the price rose up to break the resistance without hesitation. It showed great bullish momentum which supported our trade.

However, in the losing example, the first overbought signal did not reverse the price immediately. Instead, it rose up further to make a higher high before falling through the support level. This RSI signal is inferior. Hence, the trend change it signaled is less reliable.

Review – 2-Period RSI Trading Strategy

I had fun with the 2-period RSI. It is an instrumental version of RSI that you can add to your trading toolbox.

Varying Indicators: 2-Period ADX

I find value in this trading tool as it highlights where price action gets interesting.

The 2-period RSI finds potential short-term tipping points of the market. And according to whether the market tips or not, we form our market bias and get our trading signals.

According to our trading rules, we are looking for one strong oversold signal to confirm the uptrend, before we buy the next oversold signal.

What this approach implies is that one good trade is more likely to be followed by another good trade. Statistically speaking, we are depending on the serial correlation of successful signals, a useful concept in trending markets.

Our method of using the 2-period RSI to find trend changes works best when you are trying to catch the end of a well-established trend.

Larry Connors’ research comes with performance statistics. And the statistics of the RSI2 back-testing in his book looks excellent. If you feel tempted to trade it mechanically, think again because the results are historical.

However, his book, How Markets Really Work, is a great read. It has back-test results of trading strategies and price action behavior, including highs/lows, VIX, put/call ratio and more. It presents the results clearly in nice tables to show you how markets really work.

Read it for the complete answer to why Connors recommends the 2-period RSI.

(Connors has recently come up with ConnorsRSI, something I look forward to reviewing. If you want to move ahead, you can get more information here.)

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker!
    Perfect Choice For Beginners and Middle-Level Traders!
    Free Demo Account! Free Education!

  • Binomo
    Binomo

    Honest broker!

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