TRADING BINARY OPTIONS WITH RSI AND BOLLINGER BANDS - HOWTO

In the first part of this project we laid down the two indicators and why we decided to combine them in the search for a reliable system. It is time now to set up the rules and to explain when and how to trade binary options with this method.

For the RSI and the Bollinger Bands indicators use the standard setting, so there’s nothing new there. After applying them to a chart, there is one change to make: set a new level for the RSI indicator, a level that defines the middle point between the overbought and oversold levels. Therefore, if overbought is 70 and oversold is 30, the logical level that fills that function is the 50. Make sure you put it on the RSI as it is key to the system used.

The idea behind this approach is to ride strong trends, but also to spot reversals. In a strong trend, binary options traders aim to enter on market pullbacks. A bullish trend will have pullbacks that give the opportunity to buy call options, while put options are eyed in a bearish trend.

Describing the System

Any technical setup has specific rules for entry and exit, so here are the ones for this system:

1. Start with the RSI. We use the overbought and oversold levels in an unconventional way, in the sense that we wait for the market to break below the 30 or above the 70. The reason for that comes from strong trends’ behavior. When the market gyrates, it tends to break above or below the overbought/oversold levels, so we use this as a sign of a potential new trend.
2. After such a break is identified, the idea is to buy call or put options on pullbacks. For example, if the RSI breaks below the 30 level, we use the pullbacks to buy put options. Or, when the RSI breaks above the 70 level, we use the pullbacks to buy call options.
3. After the RSI breaks, the focus shifts to the Bollinger Bands indicator. The idea is to wait for the price to come back below or above the MBB (Middle Bollinger Band). For example, if the RSI breaks below the 30 level, it signals the potential start of a bearish trend. On a pullback, the price rises above the MBB. We wait for the price to come back below the MBB, and that very candle we interpret as a signal.
4. The next thing to do is to look at the RSI’s value and to compare it with the 50 level. A valid bearish signal forms when the price closes below the MBB and the RSI’s value is lower than 50. It shows weakness and represents the perfect striking price for a put option.
5. Ideally, the price reaches the UBB or the LBB before reversing course, and these are the most potent signals or the ones conservative traders use. However, trading only this setup may end up missing super strong trends.

Below is the EURUSD daily chart as we used it in our videos explaining the setup. From left to right, the RSI breaks below 30. That’s bearish, and we want to trade a pullback. 

The pullback comes, the price breaks through the UBB and then reverses and closes below the MBB (the green line). That’s the signal, and the focus shifts to the 50 level on the RSI. If the RSI is lower than 50, that’s the green light for the put option. If not, it signals a potential reverse, so the best course of action is just to wait for the market to turn.

The video analysis explains in detail all these steps and examples, making it a transparent system to use in combination with a healthy money management approach.