We are back again to RSI, but accompanied with the Moving Averages this time.
Our choices are the strategies easy to understand for the beginner traders, but at the same time attractive for the more advanced ones.
We believe this trading strategy is one those, but only backtesting can reveal all strong and weak sides of the strategy.
RSI (Relative Strength Index) is used to check the strength the trend and the possibility of the coming reversals. This indicator is popular among the traders because of the simplicity of interpretation.
What can we learn about the price from this indicator?
RSI as oscillator moves between 0 and 100 levels. The level above 70 line is the Overbought level and the level below the 30 line is the Oversold level.
We have already backtested the strategy with RSI indicator based on the intersection of the Overbought and Oversold levels.
This time let us check either another reading of the indicator common for traders (the intersection of the 50 line) is suitable for trading too.
As another trigger signal of the trade entries we take the intersection of the Moving Averages. Moving Averages are one of the best tools of the pointing the trend directions and coming reversals.
Indicators: RSI (21); 5 Exponential Moving Average, 12 Exponential Moving Average.
Timeframe: 15 min and above (we backtest at 30 min timeframe).
Currency pair: Any, but we take EURUSD as an example.
Stop Loss/Take Profit: 15/30 pips.
The trade set-up rules are very simple:
Long trade entry rules:
Short trade entry rules:
|Market||Training set||Forward testing|
|Bull||7 pips||3 pips|
|Bear||6 pips||-1.5 pips|
|Flat||-24 pips||7.5 pips|
|Market||Training set||Forward testing|
|Bull||01/03/2011-30/03/2011||09/06/2010 – 21/06/2010|
|Flat||01/09/2016 – 29/09/2016||04/05/2015 – 17/05/2015|
*How long it took us to enter the 50 trades for the Training Set and 20 trades for the Forward Testing.
A Reminder: in order to save your valuable time and efforts, we have introduced the system of backtesting when you perform only 50 trades through 3 different types of market (Bullish, Bearish and Flat markets) and then again 20 trades through the given types of market, but during other periods.
Then with simple math calculations, we can make conclusions about effectiveness or irrelevance of the chosen strategy.
The full version of the theory of our backtesting experiments and how did we came up with the idea of such backtesting you can read here.
Within the GIVEN setting the strategy didn’t reveal astonishing results: the profits gained were too small to cover even spread not saying about the leaving the trader satisfied.
If you check the period when the trades took place, you can notice that it took less than a month to enter the needed amount of trades.
In connection with the low profits gained, I guess it can show us that probably within the settings we have picked, the indicators don’t filter the trades enough – by volume of trades, but not effective ones.
Check below what settings you can try to change and backtest further.
Please, note: you shouldn’t discard the strategy, probably you can try different adjustments from the list below to find the best suitable one.
It DOES NOT mean the strategy itself is not profitable, the aim of our experiment wasn’t to give the ready advices you should blindly believe in, but to show that even the slight details of the any trading strategy should be carefully backtested before being used during the live trading.
What particularly can be a matter of the additional change and backtesting?
Although the strategy itself brought positive results within the Bull and Bear markets, such humble profits won’t matter a lot for the professional trader who perceives trading more than like a hobby.
As you can see, adjust, test and then change accordingly – is the only possible way to find the options suitable for YOU.
There are dozens of the ways to trade the indicator alone or with the combinations with other ones. We show only one way to trade, however, nothing should stop the curious minds to try different settings and check how it can influence the final results.
As you can see, backtesting is quite simple activity in case if you have the right backtesting tools.
The testing of this strategy was arranged in Forex Tester 3 with the historical data that comes along with the program.
To check this (or any other) strategy’s performance you can download Forex Tester 3 for free. In addition, you will receive 16 years of free historical data (easily downloadable straight from the software).
What do you think about such reading of RSI? What are other ways to utilize this indicator you know? Is RSI one of your favorite trading tools? What other indicator does suit it better?