"Keep it simple and smart" is often the motto among professional traders. This statement means nothing more than that the trade and the system on which it is based should be made as simple as possible. The reason for this is just as simple. The less information, the easier decisions can be made on the same basis.
This statement not only fits the technical analysis, but also affects the fundamental aspect. Ultimately, it is not a question of having as much information as possible, but of recognizing which information is relevant.
And that is why you keep hearing that traders start out simple, then over-optimize their systems and am In the end, find your way back to the simple system after you have recognized which things work and which do not.
Example of a simple trading strategy with filters
A simple strategy would be, for example, the trend-following strategy, whereby the trader has the training trend confirmed by simple means such as the moving average or a trend line. If a trend line has been confirmed by repeated testing, the trend continues. Likewise, the moving average can be considered a trend line.
Accordingly, the trend is likely to reverse if either the moving average or the trend line no longer holds. If you connect the two with each other, you already get a certain filtering.
If both the trend line and the moving average no longer hold, the likelihood that the trend will reverse is greater. A break-out strategy can then be built on this, which we will introduce below:
RSI indicator as additional filter
Admittedly, the more indicators you use, the more you move one in the direction of over-optimizing the trading system. It depends on the right indicators. With the trend-confirming indicators GDL and the trend line, two trend indicators have already been combined. That is more than enough.
An additional filter indicator should no longer show a trend, but the form of a trend. You can do this using the RSI indicator.
An RSI indicator or relative strength indicator shows the relative strength of a trend movement within the selected period. It oscillates within a range between 0 and 100.
In practice, a value of the RSI above 70 indicates an overbought situation, while a value below 30 indicates oversold situations. But the RSI is in reality not a reliable indicator, since like any oscillator it no longer works in sideways phases.
But what it is good at is primarily showing divergences - especially when it comes to breaking trends in the direction of put goes. Based on the above example, this statement is confirmed.
In the case of the first trend break, the RSI indicator clearly showed a divergence in price behavior. Although the price is trending upwards, the dynamics of the trend are weakening. This points to an early weakness in the price, possibly a correction.
However, the second trend break is not accompanied by an RSI divergence. In addition, the upward trend is confirmed by the moving average. A put option would therefore not be recommended in the second case.
Profit from movements in currency
Such a simple trading strategy could proceed according to the following points:
- It will Always use the daily chart.
- A trend reversal must be confirmed by a trendline breakout and GDL breakout.
- The RSI indicator must show a divergence.
- Only put options are bought, as downward movements are more dynamic and sustainable.
That's it. Such a simple trading strategy can be implemented particularly well with binary options, since the trader does not have to worry about the right exit. He can easily define the entry using the above steps.
With the broker binary.com, the trader has a good partner on his side. The broker also allows the trader to select the maturity for the option and trade on indices and stocks where the RSI indicator gives better signals.