The online electronic contract markets changed the world of trading. Many people ventured into trading hoping to make quick money and many succeeded. Traders tend to buy or sell securities for profit. They work in different markets — stocks, debt, derivatives, commodities, and forex among others — and may specialize in one type of investment or asset class.
Traders often do their own analytics, too. Despite the old-time stereotype of individual shouting offers and orders on a trading floor, most traders now spend their time on the phone or in front of computer screens, analyzing performance charts and polishing their trading strategies — since making a profit is often all in the timing.
Make no mistake, traders use different strategies for success. For example, let us discuss a strategy called the “Power Trend” based on RSI. The strategy works great for turbo options on almost any trading platform. Let’s put all things into perspective and look at the market from the prism of our strategy.
How to set up trading tools for the Power Trend Strategy?
As mentioned above, the Power Trend system requires only RSI. The relative strength index (RSI) is a technical indicator used in the analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period. The indicator should not be confused with relative strength.
The Pocket Option terminal offers RSI as the standard set of trading tools. To activate RSI, select it among other options.
The RSI is displayed as an oscillator (a line graph that moves between two extremes) and can have a reading from 0 to 100. The indicator was originally developed by J. Welles Wilder Jr. and introduced in his seminal 1978 book, “New Concepts in Technical Trading Systems”. Traditional interpretation and usage of the RSI are that values of 70 or above indicate that a security is becoming overbought or overvalued and may be primed for a trend reversal or corrective pullback in price. An RSI reading of 30 or below indicates an oversold or undervalued condition.
In the Power Trend Strategy, we use RSI in a different way.
Traders noticed that the indicator duplicates the price movement: if there is an uptrend, the signal line on the RSI will go up. The peaks of the Relative Strength Index Line make additional tool for interpreting the market.
The primary trend of the stock or asset is an important tool in making sure the indicator’s readings are properly understood. For example, well-known market technician Constance Brown, CMT, has promoted the idea that an oversold reading on the RSI in an uptrend is likely much higher than 30%, and an overbought reading on the RSI during a downtrend is much lower than the 70% level.
How to trade with the Power Trend strategy?
A related concept to using overbought or oversold levels appropriate to the trend 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.
- Buy the CALL contract during a breakout of the RSI from the bottom up.
- Buy the PUT contract during a breakout of the RSI from the up to bottom.
Expiration is equal to the formation of two candles.
You also can use any timeframe. The RSI parameters remain unchanged.
A bullish divergence occurs when the RSI creates an oversold reading followed by a higher low that matches correspondingly lower lows in the price. This indicates rising bullish momentum, and a break above oversold territory could be used to trigger a new long position.
A bearish divergence occurs when the RSI creates an overbought reading followed by a lower high that matches corresponding higher highs on the price.
A bullish divergence is identified when the RSI formed higher lows as the price formed lower lows. This was a valid signal, but divergences can be rare when a stock is in a stable long-term trend. Using flexible oversold or overbought readings will help identify more potential signals.