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strategies
With a little observation and
a bit of experimentation you can
create a simple trading strategy.
assumes that the “blind“ following of the standard
parameters is not successful. The same goes with the
RSI – ultimately the market can stay in extremes for a
long time if it is a strong trend – and that can lead to
losses in trading.
Modification of the Standard Parameters
With a little observation and a bit of experimentation you
can easily create a simple trading strategy even with old
indicators. In our case the RSI is calculated based on 21
candles instead of 14. Therefore the oscillator becomes
slower and less volatile. Below 40 is oversold and the
overbought-level is reached at the RSI-value of 80. We
trade this system only long in the hourly chart. We hold a
position overnight if necessary.
Entry, Stop and Re-Entry
Signal-generating is very easy with
the RSI return strategy: If the RSI
is below 40 at the close of a 1-hour
candle a long-signal is generated.
But it is only activated if the RSI then
closes above this line on the 1-hour
basis. The results of past years
confirm that the return of the RSI –
hence the name “RSI Return“ – is a
wise approach compared to direct
entry upon reaching the extremes.
Therefore you avoid to “catching a
falling knife”.
There is no profit target with this
strategy. You close the long-position,
if the RSI climbs above 80 and then
drops below.
A trading strategy is only
complete if the stop-loss is defined
to limit the losses and to secure
the book profits. In this strategy
we use a 21-period ATR stop. At
the entry we place the stop at the
F1) DAX with RSI(21) in April 2013
double ATR (Average True Range). As soon as the
trade has earned the “initial risk“ the stop is place at
break-even and afterwards it is trailed at a distance of
the simple ATR.
Example 22nd April 2013
Figure 1 shows a good demonstration of the strategy. We
see the hourly chart of the DAX with the RSI(21). There
was a small losing trade on 19th April 2013 (point 1)
and on 22nd April 2013 there was a long-signal at 7484
points as the RSI dipped below 40 and then returned
above (point 2). The initial stop was placed at 7406 points
(green) therefore there was an initial risk of 78 points.
We can see that there was a slight drop at first. On the
following day a strong increase began and at 2 pm we
could place the stop at break-even. The next trading days
showed a strong upwards movement. The RSI finally
The RSI-Return strategy generated long-signals as soon as the RSI drops below 40 and returns above it again.
Every trade has a volatility stop (green) that is calculated based on the ATR and that is trailed as soon as the
trade runs into profit.
Source: www.tradesignalonline.com
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