Moving Average Crossover with RSI Filter
Simple trend trading signals have the best chance of having an edge as they create big wins and small losses by their structure of letting winners run and cutting losers short. Also, adjusting a trend signal that is a positive expectancy model with a simple filter can improve its risk/reward ratio.
A trader will have to understand how it may alter both the size of losses and the size of winners from a backtest of the original system. Some adjustments can be backtested with the new parameters and others involve a discretionary dynamic to a mechanical system.
The traditional view of the RSI is as an indicator of when price action has moved too far and too fast in one direction. For swing and trend trading on the daily chart the RSI is commonly set at 14 days. A 30 RSI means that a chart has become oversold and a 70 RSI can mean that a chart has become overbought.
Adding an RSI filter to a trend trading system can stop you from taking a buy signal if a chart is already overbought when an entry signal is given. It can also have you lock in profits if a chart becomes overbought while holding a long position instead of waiting for the cross under to play out.
For example a trader may buy the 5/20 day ema crossover on the Goldman Sachs chart based on the backtest data but look to exit near the 70 RSI or not buy the crossover if the signal is given over the 60 RSI. Historically on the GS chart the reward of higher prices tends to diminish as GS has a reading near 70 RSI and it is possible to increase the size of wins many times by locking in profits into the strength of the rally instead of waiting for the 5 day ema to cross back under the 20 day ema as a trailing stop.
The possible drawbacks of exiting near the 70 RSI is if you are out you have to wait for a new 5 day / 20 day ema crossover to happen to signal a new entry. If the trend consolidates and continues after you have locked in profits you will miss more upside and reduce the size of the wins that were shown in the backtest.
By exiting near the 70 RSI it is possible to lock in more profits on average but not have as big of wins as you will miss parabolic uptrends. Not entering if the RSI is over 60 could reduce the size of your losses when it is too late in a trend and you miss some of the reversals against you.
These are suggestions for adding the RSI as a risk/reward filter to a moving average crossover signal but you need to research each stocks chart history to see the best adjustments that you could make to improve on the sizes of wins and losses in a positive way.
The below backtesting data is for the pure 5/20 day ema crossover and crossunder strategy is on GS and does not include RSI filter adjustments.
Just look what this trading strategy has to say. It's a simple yet quite promising Forex trading method. Trading strategies like this can only be discovered through a long and determined observation of the price behavior. To start:Currency: ANYTime frame: 1 dayIndicators: 5 SMA, RSI 5 Entry rules: Buy when the price crosses over 5 SMA and makes + 10 pips up, the RSI must be over 50. Sell when the price crosses below the 5 SMA and makes +10 pips down, the RSI must be less than 50.Exit rules: not set. It is a very very simple system, yet with quite impressive results.Always remember to take actions/enter the trade only after the signaling candle is closed. This Strategy or trading idea can be used to create more advanced trading version.
Trading with trend lines as your swing trading strategy uses the rhythm of the market and price action as the core of your trading strategy. You can not go wrong with that. Many price action traders will use trend lines as their way of determining everything from trend to reversal points. It’s not even necessary to actually draw them when you have enough experience as you can visualize them on your charts. How Trend Lines Work Trend lines are one of the most basic technical analysis tools around but powerful in their usage. First, let’s look at trend lines in terms of defining a trend. We all know that an uptrend has price making higher highs and higher lows. When we are talking about an uptrend line, we are referring to a trend line line that uses the higher swing lows and that defines the trend. When price is moving up or down, it forms those higher swing highs and higher swing lows (uptrend) and lower swing highs and lowers swing lows (downtrend). If you draw a trendline connecting a minimum of 2 higher swing lows, you have an upward trend line. The upward trendline generally trends to provide support. The opposite is true when you connect a minimum of 2 lower swing highs, what you have would be a downward trendline. The downward trendline provides resistance. This chart is using an uptrend line on a Forex chart and shows two examples of a trend line. The red line would be the first line you would draw. When price starts moving away and you have to cut through price, you will have to “fan” the trend line This is the new main trend line and you can see price bounced various times from the zones around the uptrend line. Trend Lines In An Uptrend Just because price comes close to the trend line, you will need some type of trade trigger or price action to get you into the trade. Also know these are general rules. There are a few ways to draw your trend line and the key is consistency! Understanding Trend Lines It is one thing to simply draw a line on your chart but do you know why they may/may not be valid? Every market, every Forex currency pair, they all have a rhythm to them. There will be times where price is following a general path and at other times, it will establish a different rhythm. It is this rhythm we are looking to exploit. On this chart, you can see there are several trend lines drawn. This is due to a change in the state of the market as indicated by the arrows. At various points on this chart, the market will thrust to the upside, find a price point, consolidate, and push off again. Fanned Trend Lines That is the nature of each and every market and as a technical analysis tool, the simple trend line can show you , objectively, when this occurs. What is also common, and you can prove this to yourself, is often times pullbacks in price are similar in price between each of them. Trading With Trend Lines The most common method of trend line trading is using them as support or resistance and trading the reversal off of either of them. Buying Trend Line Bounce For Buying A Trend Line Bounce Draw an upward trend line connecting a minimum of 2 higher lows (or higher swing lows) Wait for price to come come and touch the trend line at some stage down the future Place a buy stop order 2-5 pips above the high of the candlestick that touches the trend line Place your stop loss 2-5 pips below the low of that candlestick Place your pofit targets on previous significant lower swing highs (or peaks) that you see on the chart. To summarize the buy off the trend line, connect two points and wait for the third touch for the trading opportunity. For Selling A Trend Line Bounce Draw a downward trendline connecting a minimum of 2 lower highs (or lower swing highs) Wait for price to come come and touch the trendline at some stage down the future Place a sell stop order 2-5 pips above the low of the candlestick that touches the trendline Place your stop loss 2-5 pips above the high of that candlestick Place your pofit targets on previous significant higher swing lows (trougs) that you see on the chart. Selling Trend Lines The selling is the exact opposite of the buying – Look to trade the third touch of the trend line. Trading Trend Line Breaks There are 2 ways that trend line breaks can equal a trading opportunity Trade a longer term trend reversal Trade short term trend line breaks to get on the longer term trend Here we have a down trend and we fanned the trend line due to the strong pushes down in price. Trading Trend Line Breaks Each time price pulls back towards the resistance trend line, we draw a support trend line on the pullback. The trade is on the break of the trend line. On the far right of the chart, you can see the main trend line has broken. What do we do now? We wait to see price retrace to test the former resistance trend line. Will it become support? We look for price action to tell us. If we see a muted pullback, that is a great sign for an opposing trade. Strong momentum in the pullback would have me standing aside until price action showed that there will be support coming into the market. Trade Management Trade management is a skill and probably one of the most important skills you will learn as a trader. Don’t be greedy with your profits when a trade is profitable. Learn to lock your profits by moving your stop loss and trailing it behind swing highs or swing lows that form as price moves in favor. The reason for this is that there is less chance of you getting stopped out frequently as you are placing it behind support and resistance levels essentially. Now, some people may decide to use profit targets while others will take more of a position trading approach with trend lines. They are trading the trend and will only exit when the trend has shown itself to be broken by a break in the trend line. The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into the technical system. -Ed Seykota
Three White Soldiers & Three Black Crows, what’s these got to do with forex swing trading??? Well, relax, these are the names given to two very specific reversal candlestick chart patterns shown below: Three white soldiers pattern The three white soldiers pattern is a bullish reversal candlestick pattern and here is how it forms: first the market has to be in a downtrend. next you have 3 green bullish candlesticks that form-giving you the three white soldiers chart pattern. Usually when the three white soldiers pattern is formed, it signals the end of the downtrend. Three black crows pattern. The three black crows pattern is a bearish reversal candlestick chart pattern that consists of 3 bearish candlesticks. Here is how the three black crows chart pattern forms: the market has got to be first in an uptrend. then three bearish candlesticks from-the three black crows. Once the three black crows are formed, usually it signals the end of the uptrend. HOW TO TRADE THE THREE WHITE SOLDIERS & THREE BLACK SOLDIERS PATTERN Do you need to trade all the 3 white soldiers or 3 black crows patterns that you see? No. The location where these chart patterns form is very important. You want to be able to trade these chart patterns in areas of: support and resistance levels pivot levels. Fibonacci levels It does make more sense to trade these chart patterns on these kind of level as there will be more significance involved. THE TRADING RULES ARE VERY SIMPLE if a three white solider is formed, place a buystop order 3-5 pips above the high of the 3rd candlestick or if a three black crows form, place a sell stop order 3-5 pips below the low of the 3rd candlestick. Place your stop loss above the 3rd candlestick’s high if you placed a sell stop order or place a stop loss below the 3rd candlestick’s low if you entered a buy stop order. Take profits may be placed targeting previous swing highs or lows (peaks or bottoms). Move stop loss to breakeven when price moves by the amount risked or move stop loss to break even when price has made a swing high or swing low. Learn to take partial profits off the table when price moves at least halfway point to reach your take profit target level.