Success in trading on electronic contracts depends on many factors. The main one, of course, is the price direction. However, in contrast to the same Forex, traders will not be able to wait out a temporary price drop if they will a little wrong with the analysis. Expiration time limits freedom of action.
Market members need to determine not only the direction but also the strength of the current movement. This method will significantly reduce the risk of buying a contract when the trend changes.
Therefore, among traders all over the world, the Relative Strength Index or simply RSI is very popular. Market members who use this indicator can not only determine the strength of the trend, but also find the optimal position for buying an option.
RSI can be found in the list of standard indicators in the Pocket Option terminal.
Index calculation and its appearance
The Relative Strange Index is located at the bottom of the screen in a separate window. This indicator has a scale, levels and a signal line like many other oscillators. Renowned financier V. Wilder was invented RSI for use on any exchanges.
The calculation formula proposed by the author is as follows:
RSI = 100 – 100/(1+C),
C is the ratio of growth average value to the average value of a decrease in an asset over a selected period.
Wilder recommends setting the 14th period regardless of which timeframe the trader works on. This value is set default in the Pocket Option terminal. To check this, user needs to click on pencil in upper right corner of the indicator window.
As mentioned above, the Relative Strength Index is represented by a scale with a signal line. The key levels here are: 0, 30, 70 and 100. The first pair forms an oversold zone, and the second pair is overbought zone.
The main signals of RSI oscillator
Now it is time to figure out how the above indicator will help traders in trading electronic contracts. In this case, the following signals will be significant:
- If the index is directed upwards and is between 30 and 70, then there is a strong uptrend in the market;
- If the index is downward and is between 30 and 70, then there is a strong downward trend in the market;
- If the line is located in the overbought zone, sales are likely to start soon;
- If the signal line is located in the oversold area, then in the near future active purchases will begin.
Therefore, based on the above information, it can be concluded that the ideal signals for buying contracts are the following:
- buy a CALL when the signal line crosses level 30 upwards;
- buy a PUT when the signal line crosses level 70 downwards.
Recommendation. It is better to set the expiration time equal to the time of formation of 2 candles, regardless of the timeframe.
RSI is a universal instrument that can not only determine the strength of the current movement, but also indicate the optimal conditions for the purchase of a contract. That is why it is very popular, both among beginners and professional traders.