20 SMA with RSI Forex Swing Trading Strategy

October 4, 2016

701

20 SMA with RSI Forex Swing Trading Strategy

20 SMA is a good strategy for beginners because it is easy to comprehend. It best works on a 4-hour and daily timeframe. This strategy is a trend following method that uses 20 SMA to determine the direction of the trend and RSI to determine the strength of the trend.

Indicators needed:

SMA 20
RSI: should be set to 5 days, 50 RSI level.

Uptrend and Downtrend:

Uptrend: The price is above the 20 SMA.

Downtrend: The price is below the 20 SMA.

RSI Description:

When the RSI reached the peak above the 50 level and turns down, then the market is going down or the uptrend is weakening. Sell opportunities could then be considered.

The end of the downtrend will be determined when RSI level reached the peak below the 50 level and starts to go up. Buy opportunities could then be considered.

Trading Rules:

Sell Entry:

Price has to be below the 20SMA indicating a downtrend.
The price must retrace or rally back up and touch the 20SMA line.
Once 20SMA line is touched, look down to see if the 5day RSI has peaked above 50level and has started to turn down-confirming a weakening upward momentum.
Place a sell stop order under the low of the candlestick (after it closes).
This candlestick should coincide with the RSI starting to turn down.
Place Your stop loss above the high of that candlestick.
Your target profit would be 1:3 ratio. It is 3 times what you risk. You can also take profit when the opposite trading signal appears.

Buy Entry:

Price must be above the 20 SMA indicating an uptrend.
The price must pull back down and touch the 20SMA line.
Once 20SMA line is touched, look at the 5day RSI, it must reach the bottom below 50 RSI level and has started to turn up confirming a weakening downward momentum.
Place a buy stop order above the high of the candlestick (after it closes).
This candlestick should coincide with the RSI starting to turn up.
Place Your stop loss below the low of that candlestick.
Your target profit would be 1:3 ratio. It is 3 times what you risk. You can also take profit when the opposite trading signal appears.

ADVANTAGES:

Comprehensive
Good for a trending market.
Stop loss is quite small.
A great risk to reward ratio as well.

DISADVANTAGES:

Not good in ranging markets.
Sometimes price may not rally or pullback to touch the 20SMA line until very later on and by that time that price movement would have been already exhausted and the market may be looking to reverse direction.
Moving averages indicators are lagging indicators. The market has already made a big move before it will retrace.

HOW TO IMPROVE YOUR TRADE ENTRY:

You must buy using reversal candlestick patterns that form when the price touches the 20SMA line. Look for reversal candlesticks like:

Harami
Engulfing pattern
Dark Cloud Cover
Evening Star Doji
Shooting Star/Hammer.

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