RSI Trend Resumption Forex Trading Strategy
Sometimes, looking at things from a different angle pays. The same could also be true with trading. Although it is usually logical to trade the way the crowd trades, bear in mind that the crowd often loses money to the market. So, I guess it is worth it to explore a different angle other than how the crowd sees things. It pays being unconventional.
With this strategy we will be looking at an unconventional way to look at and use the Relative Strength Indicator (RSI).
The RSI is one of the more popular indicators used to determine overbought and oversold market conditions. By doing so, we could determine potential market reversals for a good mean reversal trade. This is the usual way of using the RSI.
However, there are times when even though the RSI is overbought or oversold, price take time to reverse and tend to linger around the overextended area. These scenarios often occur during trending markets. Of course, if price is trending, oscillating indicators that are more reflective of price action would tend to stay where it is. It can’t go further because oscillating indicators are bound within the range, but it also would find it difficult to reverse because price action is going in one direction.
But even trending markets need to rest for a while. During these resting periods, price would often retrace a little bit. However, due to the prolonged stay around the overextended areas, the oscillating indicators retracement would often be magnified. A short retracement on the price chart might mean a retracement of around 50% on the oscillating indicator. Disregarding the context of a trending market, traders who use the RSI in a traditional manner would often be faked out into believing that the market is about to reverse, when all the market is doing is having a short retracement.
But what if we take the contrarian use of the RSI during these scenarios? What if we are actually waiting for the amplified RSI retracement to trigger our entry? This would make things more interesting for us.
The Setup: RSI Trend Resumption Strategy
The idea behind this strategy is to identify trending markets wherein the RSI has been staying over the 70 level on a bullish trend, or below 30 on a bearish trend. These trending markets are sure to retrace. However, short retracements on the price chart would often bring the RSI back to 50. In a bullish market, the retracement would go below 50, while on a bearish market, the RSI would go above 50. As soon as RSI reverses back towards our direction, we then enter the trade on the direction of the initial trend.
Of course, we can’t rely purely on RSI to determine our trend. The RSI is simply not intended for that purpose. To help out our RSI, we will be using the following Simple Moving Averages (SMA):
- 20 SMA (green)
- 50 SMA (brown)
In my opinion, the SMAs tend to be more jagged as compared to Exponential Moving Averages. This characteristic would be more beneficial when used with the RSI, since the RSI also tends to be on the jagged side itself.
To use the SMAs, we would be looking at it as a trend direction indicator or confirmation and as a dynamic support or resistance. On a bullish trending market, price should be above the 20 SMA, while the 20 SMA is also above the 50 SMA. On a bearish trending market, this stack would be in reverse.
Then, as price retraces, it would be drawn in between the SMAs. Then we wait for our RSI trigger to determine our trend resumption.
Timeframe: preferably on the 1-hour timeframe
- RSI should be around the 70 level for an extended period
- The 20 SMA should be above the 50 SMA
- Wait for price to retrace between the 20 & 50 SMA
- Wait for the RSI to retrace below 50
- Wait for the RSI to bounce back above 50
- Enter a buy market order on the candle close corresponding to the bounce back above 50 RSI
Stop Loss: Set the stop loss at the fractal below the entry price
Exit: Close the trade on the candle that closes below the 20 SMA
- RSI should be around the 30 level for an extended period
- The 20 SMA should be below the 50 SMA
- Wait for price to retrace between the 20 & 50 SMA
- Wait for the RSI to retrace above 50
- Wait for the RSI to bounce back below 50
- Enter a sell market order on the candle close corresponding to the bounce back below 50 RSI
Stop Loss: Set the stop loss at the fractal above the entry price
Exit: Close the trade on the candle that closes above the 20 SMA
This simple yet unorthodox strategy does have logic with it. Observing how amplified retracements are on the RSI during a trending market, you would notice that these retracements could be ideal entries as soon as the trend resumes. You would also notice how RSI would stay on the right side of the 50 level when the trend is still strong. By taking this approach in using RSI, we will be able to use it as a trend continuation strategy instead of the usual mean reversion use of the RSI.
Forex Trading Systems Installation Instructions
RSI Trend Resumption Forex Trading Strategy is a combination of Metatrader 4 (MT4) indicator(s) and template.
The essence of this forex system is to transform the accumulated history data and trading signals.
RSI Trend Resumption Forex Trading Strategy provides an opportunity to detect various peculiarities and patterns in price dynamics which are invisible to the naked eye.
Based on this information, traders can assume further price movement and adjust this system accordingly.
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How to install RSI Trend Resumption Forex Trading Strategy?
- Download RSI Trend Resumption Forex Trading Strategy.zip
- Copy mq4 and ex4 files to your Metatrader Directory / experts / indicators /
- Copy tpl file (Template) to your Metatrader Directory / templates /
- Start or restart your Metatrader Client
- Select Chart and Timeframe where you want to test your forex system
- Right click on your trading chart and hover on “Template”
- Move right to select RSI Trend Resumption Forex Trading Strategy
- You will see RSI Trend Resumption Forex Trading Strategy is available on your Chart
*Note: Not all forex strategies come with mq4/ex4 files. Some templates are already integrated with the MT4 Indicators from the MetaTrader Platform.
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