The binary options market has evolved greatly since its early beginnings. Binary options depend on the outcome of a “yes or no” proposition, hence the name “binary”. The market used to be traded exclusively by high net-worth investors and financial institutions. Only in 2007 the Securities and Exchange Commission approved proposals to open the market up to the public. Since then, the market transformed and the number of independent traders grew exponentially. The binary options markets now incorporate trading in almost every financial instrument on the market today.
Success in trading depends on technical and fundamental analysis. However, even though the correct prediction the price is important, there are unpredictable turns in the market. It is a win or lose situation.
That’s why if you are beginner experts recommend not opening a position at the final stage of the trend formation before you determine the strength of the trend. To do so, traders use many indicators including the Relative Strength Index (RSI).
The relative strength index (RSI) is a momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset.
The Pocket Option trading terminal offers a wide range of instruments and tools for analysis including the Relative Strength Index (RSI).
How the RSI Works?
First of all, let us reiterate that the RSI belongs to the oscillators. It is displayed in a separate window under the price chart and it looks like a scale with a signal line.
In the Pocket Option platform, the bottom level 30 is yellow. The space below it is called an oversold zone. If the signal line is below 30, it means that supply is bigger then demand. Traders sell more then they buy.
The upper level 70 is blue. It indicates an overbought zone. So, if the signal line is above it, then demand is bigger than supply. Traders buy more than they sell. It means uptrend.
The indicator was originally developed by J. Welles Wilder Jr. and introduced in his book “New Concepts in Technical Trading Systems” in 1978.
Formula and Recommended Settings for the RSI
The relative strength index (RSI) is computed with a quite complicated formula:
RSI = 100 – 100/(1+ОС), where OC is 
The average gain or loss used in the calculation is the average percentage gain or losses during a look-back period. The formula uses positive values for the average losses. The standard is to use 14 periods to calculate the initial RSI value. The timeframe is not important.
Once there are 14 periods of data available, the second part of the RSI formula can be calculated. The second step of the calculation produces the results.
Signals are considered overbought when the indicator is above 70% and oversold when below 30%. The RSI compares bullish and bearish price momentum plotted against the graph of an asset’s price.
The RSI will rise as the number and size of positive closes increase, and it will fall as the number and size of losses increase. The second part of the calculation checks the result, so the RSI will only near 100 or 0 in a strong trend.
How to Trade Binary Options on Signals from the RSI?
The primary trend of the stock or asset is an important tool in making sure the indicator’s readings are properly understood.
During a downtrend, the RSI would peak near the 50% level rather than 70%, which could be used by investors to more reliably signal bearish conditions.
The general recommendations are:
- The CALL option when the signal line crosses level 30 from the bottom up.
- The PUT option when the signal line crosses level 70 from top to bottom.
The expiration period should be more then the formation time of 2 candles.
The contract is done ONLY when the line leaves the overbought or oversold zone.
A general recommendation for trading with the RSI for beginners is to focus on trading signals and techniques that conform to the trend. In other words, using bullish signals when the price is in a bullish trend and bearish signals when a stock is in a bearish trend will help to avoid the many false alarms the RSI can generate.
