When viewed from within, the financial market is a balance of "bears" and "bulls." That is what the forces that push or pull the price up or down are called. The task of the trader is to recognize when these unstable equilibrium points occur, when one of the parties takes the initiative, and as a result of which an upward or downward trend begins. This is the best time to open trades.
Oscillators are an effective tool for solving this task. In this article, we will look at a short-term strategy for Binomo based on the Relative Strength Index (RSI) and the Exponential Moving Average.
Trading strategy rules
Asset and time tradingThe optimal choice is the CRYPTO IDX cryptocurrency index. It is available around the clock. Also, during the active period of the US-European exchange session, you can use EUR/USD, GBP/USD, and similar options.
Money management. The upper limit on the value of contracts is 5% of the current trading capital account balance.
Preparing the platform for analysis
Trading is carried out using the integrated toolset on the Binomo platform.An advantage of this approach is the possibility to conduct effective technical analysis on minimal update intervals of the chart, from 5-15 seconds. We'll provide step-by-step instructions on how to prepare the Binomo terminal for market analysis and trading on the strategy.
- The chart. Trading is conducted on a 5-second candlestick chart. Such a low update interval requires an asset with high amplitude of fluctuations and frequent updates of quotes. Therefore, the best choice will be CRYPTO IDX, as it was specially created for such purposes. It is also possible to use EUR/USD if its volatility ensures full candles will be rendered on the chart.
- IndicatorsWe superimpose the RSI oscillator on the chart, leaving its standard period of 14, but setting both boundaries of the zones at the level of 50%. We also add the Exponential type Moving Average with a period of 50.
- Contracts. For trading, the standard fixed “Higher/Lower” contracts with default expirations of 1 minute are used. The amount of investment is determined according to the rules of money management to ensure an acceptable level of risk.
The final step is to set the vertical scale in the RSI window. It should be such that the edge of the band touches the upper and lower boundaries. By default, the size of the elements is such that the oscillator curve often deviates very little from the neutral position. This makes it difficult to visually distinguish reversal signals.
The reversal signals of oscillators and Moving Average curves are known for their simplicity of recognition. But this does not negate the need to distinguish between false positives. More than 60% of the signals are actually formed during a short-term price correction rather than a real trend reversal. And even when trading fixed contracts, they do not always allow a profit to be made on the trade because of their short-term nature. Price correction, in contrast to a trend reversal, ends quickly.
Trading signals on the strategy:
- On an increase - recording the price on the chart above the level of the Exponential Moving Average, combined with the RSI oscillator transitioning to a position above 50%, which is the overbought zone.
- On a decrease - recording the price below the level of the Exponential Moving Average, as well as the RSI transitioning to a lower position, the oversold phase.
An important nuance when trading on the strategy is recognizing a false EMA breakdown. If you look at the historical data of the chart, it is easy to find that the candles come in contact with the Moving Average many times, or even break through it. This is sometimes combined with a synchronous RSI reversal signal.
Practical advice for traders
Entering the market, making the purchase of a trading contract, should only be done after the market is firmly fixed in a certain position. Novice traders can rely on two clear criteria. First, there should be at least 3 candles that continue to move in the established direction. A false breakdown will reverse at the next price bar in most cases.
The second nuance is the distance of deviation from the EMA. If it exceeds in height the average body size of the candles for the last 10 elements, then you can enter the market. These points are shown in the illustrations above. As you gain experience in real trading, your skill in being able to quickly assess the situation on the chart improves, which will allow you to reject up to 80% of false correction signals.