How to trade RSI profitably: RSI + 5 MA + 12 MA trading strategy

A Couple of Words About Indicators

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?

• overbought and oversold levels (in two words – you do not set the buy trade when the indicator is in the overbought level and vice versa – you do not set the sell trade when the indicator is in the oversold area);
• divergence – when the price still shows the continuing trend, but the indicator form extremes in the opposite direction of the trend signaling that his trend is about to finish;
• also this indicator can form different figures of the technical analysis and they can be interpreted as the end of the trend coming.

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.

Technical Information

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:

1. 5EMA should cross the 12 EMA to the upside, providing a signal of the possible reversal into the uptrend.
2. RSI should cross the 50 level upwards.
3. At the candlestick when the two conditions are met, enter the Buy trade.

Short trade entry rules:

1. 5EMA should cross the 12 EMA to the downside, providing a signal of the possible reversal into the downtrend.
2. RSI should cross the 50 level downwards.
3. At the candlestick when the two conditions are met, enter the Sell trade.

Backtesting Results

Profits

Trades|Period*

*How long it took us to enter the 50 trades for the Training Set and 20 trades for the Forward Testing.

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.

Conclusions

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.

Further Adjustments for Better Results

What particularly can be a matter of the additional change and backtesting?

• At the beginning of the article we have mentioned the readings of the RSI – try the strategy with the 30/70 levels intersection.
• Stop loss and take profit – maybe manual setting of the SL and TP over/below the swing high/swing low can work better to prevent the premature exits.
• Timeframe and the currency pair – try this strategy for scalping or the daytrading;
• You can try RSI indicator alone or accompanied with other indicators. Try what combo can work the best for you – maybe Stochastic or RSI, Awesome Oscillator or Parabolic SAR.

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.

Try It Yourself

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 with the historical data that comes along with the program.

To check this (or any other) strategy’s performance you can download Forex Tester for free. In addition, you will receive 22 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?