Learn one of the best trading strategies in the binary options field – the Moving Averages and RSI strategy. We will also show you the tips to use it effectively.
Trading with Moving Averages and RSI
The Moving Average and Relative Strength Index (RSI) are two of the most well-known and useful technical indicators in the online trading world. The Moving Average helps identify entries when the market is trending, while the RSI provides high-precision trading signals in a consolidating environment. Due to their strengths, combining the Moving Average with the RSI can create a comprehensive trading system usable in various market conditions.
In this article, we will show you how to build a highly accurate binary options trading system using the Moving Average and RSI indicators.
The Moving Average Indicator
The Moving Average (MA) is one of the oldest technical analysis tools; it was even used before computers were invented. The main function of the MA is to sketch trends in the market, helping traders find trend-following entries.
On the charts, the MA is displayed as a line that follows price action. It shows the average price of an instrument over a specific period of time. For example, a 10-period MA line on the daily chart is constructed by taking the average price over the last 10 days.
The calculation for the MA can be done using the close, open, high or low price of a candle. However, traders usually use the closing price to calculate the MA.
There are 4 types of Moving Averages namely Simple, Exponential, Linear Weighted and Smoothed MAs. Among them, Simple and Exponential MAs are the most commonly used. The Simple Moving Average is abbreviated as SMA, while the Exponential Moving Average is EMA.
Moving Averages can be used for any kind of financial instruments (stocks, indices, FX currency pairs, cryptocurrencies, etc.). It delineates market trends much more flexibly than a trend line does, and that’s why it’s extensively used.
The Relative Strength Index (RSI)
The RSI is a famous oscillator first introduced in 1978 by the legendary trader J. Welles Wilder. The original purpose of this indicator is to identify overbought and oversold areas where reversals or corrections can occur.
On the charts, the RSI is displayed below as a line moving between 0 and 100. The 30 and 70 levels help traders determine when an asset is overbought or oversold. An asset is considered overbought when the RSI exceeds 70; conversely, the asset is considered oversold when the RSI crosses below 30.
The 50 level of the RSI is also important. It helps determine which side is dominating the market. If the RSI moves above 50, it indicates that bulls are having the upper hand; contrarily, a movement below 50 signals that bears are prevailing.
The RSI is often used to find trading opportunities in the sideways or consolidating market conditions. It can also be used to determine if a trend is coming to an end.
How to Trade Binary Options With Moving Averages and The RSI
As mentioned, Moving Averages work best when the market is trending, while the RSI is a killer in the consolidating environment. Therefore, the combination of these indicators can make a comprehensive binary options trading system that works in various market conditions.
To trade binary options with the Moving Averages & RSI system, you first need to determine the current market condition. When the market is trending, the MAs will be used as the main tools to find trend-following entries, while the RSI acts as an assistant tool to confirm signals from the MAs. On the contrary, when the market is moving sideways, the RSI will be used to find trading opportunities, while the MAs act as assistant tools to affirm the current market condition.
Below are the ways to trade with the Moving Averages & RSI system:
- When the market is trending:
- Call signal: When prices are above MAs, and the RSI is between 50 – 70.
- Put signal: When prices are below MAs, and the RSI is between 30 – 50.
- When the market is moving sideways:
- Call signal: when the RSI crosses above 30 (in other words, it returns from the oversold territory).
- Put signal: when the RSI crosses below 70 (coming back from the overbought territory).
Below are some useful tips when using the MA & RSI system:
- The default parameters of MAs and the RSI are 14, and these parameters are the most commonly used among traders. However, you should change them according to your trading time frame and instrument. Typically, traders use low Moving Average settings (5, 10, or 15-period) on short-term time frames (1 minute, 5 minutes, 15 minutes), and use high settings (50, 100, or 200-period) on long-term time frames (4 hours, daily, weekly, monthly).
- Combining candlestick patterns with the MAs & RSI system can help you find more accurate trading signals. For example, when the price is above the MA and the RSI is between 50 – 70, you should wait for a candlestick pattern confirming bulls are prevailing before opening a buy position.
- Using 2 or 3 MAs with different parameters can help you identify trends more accurately. Some commonly used MA sets are EMA 8 & EMA 20, EMA 20 & SMA 50, and SMA 100 & SMA 200.
The Moving Averages & RSI trading system is comprehensive, flexible, and easy to use. Its installation is also simple because these indicators are integrated on most trading platforms today.
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