Trading strategy on a fractal reversal with the RSI filter

Trading strategy on a fractal reversal with the RSI filter

Bill Williams is one of the most famous traders in the world.

He was, in fact, a pioneer in the field of modern trading.

He founded the world’s first school to teach trading on the market.

Bill is better known as the developer of several popular indicators.

The most popular ones are the “Alligator” and “Fractals.”

Let’s find out the effective strategy combining Fractals and the RSI.

Saqib Iqbal 365

Content

What are Bill William and RSI indicators anyway?

What are Bill William and RSI indicators anyway?

Bill William and RSI indicators are a tool you use in technical analysis.

They are handy in determining the direction of the trend.

Let’s briefly explain them:

Bill Williams’ Fractals have little to do with fractal mathematical theory.

Fractals draw arrows to mention highs and lows.

Usually, the red color illustrates a bullish trend.

Conversely, the blue color represents a bearish trend.

Now, fractals draw a U-shaped pattern on the chart.

Fractals draw a U-shaped pattern on the chart

This U-shaped pattern indicates highs and lows.

These highs and lows occur according to the candlesticks.

In an uptrend, the price moves down and then goes up, forming a U.

Contrary, in a downtrend, the price moves from up and comes down to form a U.

Now, let’s move to the RSI.

RSI is an acronym for the Relative Strength Index.

It is one of the most popular indicators of the oscillator class.

It consists of one line.

The calculations of this line happen by a complex formula.

The formula averages the chart’s price values for a certain past period.

The RSI line shows oversold and overbought conditions from 0-100.

When the indicator illustrates above 70 reading, it’s overbought condition.

It suggests buyers are winning, and the trend will come down.

Conversely, when the RSI marks below 30 readings, it’s oversold condition.

It mentions sellers are driving, and the trend can go up.

50 is the neutral level.

It marks neither bulls nor bears are winning.

In this strategy, the Relative Strength Index acts as a filter.

It is because fractals frequently surface on the chart.

You have to combine it with another indicator to filter the market noise.

Such market noise or whipsaw makes detecting entry and exit points harder.

So, we have to use an oscillator to help limit these whipsaws.

Hence, the RSI oscillator helps in filtering any false signals.

Further reading

How can you configure your trading platform?

How can you configure your trading platform?

To apply the strategy, you have first to set your trading platform.

There’s no rocket science behind it.

Let’s walk you through how you can configure your platform.

Often, I see traders neglect setting up their trading platform.

Setting up a trading platform is part and parcel of any trading strategy.

Charts show us plenty of info, so what we need to do is concise this data.

We can only compress the data if we set up our trading platform accordingly.

When setting up your trading platform, you should ask;

“What timeframe should I use”?

Which indicator/indicators are best for me”?

“Which chart should I apply”?

I am answering these questions before the trade helps you get the relevant info.

One of the good things about this strategy is applying it to any asset.

For instance, you can use it for any forex pair or stocks.

However, there’s an exception.

You can’t use the strategy on cryptocurrencies with USD pair.

For example, BTC/USD and LTC/USD, etc.

It is because they have a low-profit percentage.

How to set up the platform?

Here’s how you can set the platform:

  • asset: any currency pair or shares and raw materials;
  • time frame: from 15 seconds to 5 minutes, ideally 1 minute;
  • expiration: depends on the time frame, it should equal 2–5 candles;
  • investment: according to risk-management rules, 1–5 % of the account or less;
  • indicators: the Alligator with a display function for fractals and RSI.

You need to configure the RSI specifically.

The period of the RSI should equal 8.

The indicator’s overbought/oversold zones should match 50-mark.

Now here’s an excellent idea to make things more interesting.

You can make the overbought area green.

And you can paint the oversold region red.

You can see an example of an RSI indicator in the picture below.

RSI indicator on the chart

RSI indicator on the chart

Further reading

Signal for options "up."

Signal for options

Now that you have set the platform, it’s time to enter the trade.

There are two conditions for opening an extended position.

Let’s find out which are those.

This fractal has a structure like a downward triangle. First, the chart should show a descending fractal.

You can find it under a Japanese candle.

Secondly, the oscillator must cross level 50 and enter the overbought zone.

Signal up option chart

Signal up option chart

The extremum consists of 5 candles.

So, there is a delay of two price elements in real-time before it appears on the chart.

In most cases, a fractal appears first, followed by confirmation from the RSI.

You can enter the market right after the closure of the signal candle.

The signal candle suggests there was an intersection of the RSI zone borders.

After these conditions, you can enter the trade.

Further reading

Signal for options "down."

Signal for options

For entering short, you can reverse the buying strategy.

The signals are similar, and here’s how you can apply them.

First, you need to look for an upward fractal.

And a transition of the RSI to the oversold area.

For clarity, here’s the picture illustrating the option down signal:

You can see that we enter after three candles of the extremum.

It a model because the confirmation from the filter didn’t appear immediately.

Signal down options chart

Signal down options chart

Further reading

An example of trading on a fractal reversal

An example of trading on a fractal reversal

Now that you know signals for up and down options, let’s move to a standard.

This example will help you in practicing the strategy.

The actual model effectiveness of strategyis comes when you practice them.

We’ve done that, so you don’t have to go through the hassle.

For this example, we opened a trade on the Binomo platform.

We chose the crypto index.

And the timeframe we chose was 30-second.

We selected this timeframe because signals form better on it.

Timeframe selection

Timeframe selection

So, we instantly got a signal to buy an “Up” option.

It was the intersection.

The RSI and the downward extremum produced the signal.

Therefore, we opened a trade on the increase.

The expiration time was 2 minutes, which on our timeframe equals four candles.

We didn’t get a strong trend.

However, we can see a bit of deviation to profit from trading options contracts.

So we got our $8 net profit on a $10 investment.

There was a signal on the market to purchase an option “Down,” also.

It happened when the RSI returned to the oversold zone.

And above the candle, there was an upward fractal.

Further reading

Is the strategy worth it?

Is the strategy worth it?

Now, I know many of you are thinking, is the fractal RSI filter strategy worth it?

Well, let’s find out.

The fractal reversal RSI filter has pros and cons like any other strategy.

Let’s talk about the pros first!

The strategy is a great predictor of a trend reversal.

The combo of fractals and RSI is an excellent blend for finding a trend reversal.

The fractal reversal RSI filter

Like mentioned earlier, fractals appear first, and the RSI confirms the signal.

When you see the reversal, you can enter after the confirmation.

Now, lets’ talk about the issues you may face in this strategy.

Sometimes you can’t have the perfect trend.

You get the confirmation signal, but the trend doesn’t go your way.

It’s because the fractals do pop up frequently on the chart.

And even we use the RSI; sometimes there are a few deviations.

Although this strategy is accurate, you also must look for these points.

Further reading
FAQs

FAQs

How the strategy shows reversals?

The strategy pinpoints trend reversals by plotting fractals and using the RSI filter. Fractal is the main indicator while RSI is a confirmatory tool.

Why use the RSI in the strategy?

RSI filters the market noise that fractals may not detect. Also, it confirms whether the market has already reached a mature trend or if the trend is still juicy to jump into it.

How to enter the trade by using the strategy?

You can enter by confirming a trend reversal and then enter on the next candle.

How to exit the trade by using the strategy?

You can exit the trade when the trend changes its course. Look at RSI overbought or oversold conditions.

Is the strategy worth it?

Yeah, fractal reversal with RSI filter is worthy for binary options trading. You can apply it on any timeframe. Better test things on demo before going live.

Final thoughts 

The Fractal reversal trading strategy with the RSI filter is super effective.

It helps you in finding trend reversals quickly.

So, you can enter and exit the trade accordingly.

Further reading