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RSI – Overbought and Oversold Levels

3
Academy
Level
One of the most important, if not the most important indicator of them all is the Relative Strength Index (or the RSI as it is known) and basically probably there is no trader in this world that didn’t look at it at least once or tried to integrate it in the analysis.

The RSI is offered by all trading platforms, CFds or binary options, either under the oscillators category or under the momentum indicators and the default period to consider is the 14 period. This means the indicator is taking the last 14 candles and interpret the closing levels on it and based on that data is plotted.

Relative Strength Index – Interpretation

The result is interpreted based on the 70 and 30 levels and these levels are the standard levels offered by all brokers. The standard interpretation for the RSI is that the 70 level represent overbought conditions and 30 level oversold conditions.

  • When trading binary options, the 70 area should be a nice place to buy put options while the 30 level should be the place/area to buy call options.
  • When trading CFDs, 70 area means that the underlying asset or currency may be reaching peak price so sell order should follow. With 30 level, it would indicate a place to buy.

Does this work all the time?

The answer is no but, it is working most of the times when a consolidation pattern is identified. So in order to trade this one successfully go on the bigger time frames and identify a triangle or a range and then trade it on lower time frames with the RSI. The live trading recordings with this educational series show exactly how to trade the RSI on an EURUSD chart and also shows how to apply the indicator to any given chart.

Is an Asset Oversold or Overbought – Find Out with RSI

Like any oscillator, the RSI is designed to show extreme levels, namely overbought and oversold levels, but it is important to note that this strategy works best with markets that are consolidating, namely markets that are in a range. To find such areas, one should trade patterns that are most likely to be followed by ranging conditions but also it is possible to identify ranges when looking at the trading session you are interested in trading. For example, in terms of Elliott Waves Theory, an impulsive move has two corrective waves (ranges) that are following impulsive moves of a lower degree.

This means that if you are in an extended third wave move and the extension is done, the 161.8% is done, then looking at the previous second wave can offer clues about how the fourth will be:

  • If the second wave is a simple correction, then the 4th wave should be complex and take more time, so a range is possible to form here.
  • If the impulsive move is a bullish one, then buying call options every time the RSI is coming into the 30 area is indicated with the expiration date being adjusted according to the time frame the RSI is applied on.

Find the Perfect Strike Price with RSI

Another thing to consider when looking for ranges is to trade Asian session as in the Asian session markets are not moving much due to lack of liquidity and the fact that European and North American sessions are more price action packed. Therefore, trying to identify overbought and oversold levels based on a range might work very well as the RSI is giving these levels for finding the perfect striking price for your option or CFD.

One thing worth mentioning about oscillators is that an oscillator is always being plotted on a separate window below the main chart and that the settings or the period to be taken into consideration can be changed. We recommend the 14 periods, and this means the indicator will take into account 14 different candles, so depending on the time frame you are applying the indicator, 14 periods mean 14 different candles. However, the number can be changed and, of course, the plotted RSI will change as well.

  • Of course, the bigger the number of candles taken into account will be, the flatter the RSI will be, and, therefore, more difficult for overbought or oversold levels to be reached.

Special Circumstances

Another thing that might be interesting when trading binary options with the RSI is referring to divergences between the indicator and price, but these usually end up working only under specific circumstances. But that is another project to be addressed here on Binary Options Academy. If looking for specific levels to be broken, then the RSI is showing different values on different time frames as it is only normal in one-time frame to be overbought and in another one not. In other words, the expiration date for any possible option to be traded on the daily chart is definitely different than an option taken from the hourly chart as, again, the RSI is taking into account two different things.

The EURUSD examples in the recordings above are showing you how to apply the RSI indicator, where to find it and much more.