Forex Swing Trading Strategy #5 (20 SMA with RSI Swing Trading System)

This RSI trading system uses the 20 period simple moving average (20 SMA) and is perfect for an easy swing trading strategy in markets such as Forex.

The RSI trading indicator is a measure of the relative strength of the market and is often used as an overbought and oversold technical indicator.

RSI – Relative Strength Index created by J. Welles Wilder, Jr.

As with any trading strategy, you want to make sure you are looking at a trending market which is quite easy to see if using a moving average.

chop and trending price action

Moving average can highlight trends and consolidation

You can see when price chops back and forth through a moving average, you are looking at a market in consolidation.  That’s not a bad thing if you are looking for break out trading opportunities with your trading system.  A gap between the moving average (20 SMA) favors a trending outlook on this time frame.

 

Determine If Your Market Is An Uptrend or Downtrend

The 20 SMA with RSI swing trading strategy in a nice trending market can bag you hundreds of pips very easily, especially if traded on the 4 hr or daily time frames especially when Forex trading.

As a Forex trader, you are looking at some of the best trending markets available.  This is a great strategy to take full advantage of that fact.

Is this method suitable for day trading?

If you have time to sit at your computer and have identified a trending trading session, you may want to test the RSI trading system to see if it fits you as a trader.

How do we determine what direction our trend is?  We can simply look at our moving average

  • when the price is above the 20 sma the market is in an uptrend.
  • when the price is below the 20 sma the market is in a downtrend

 

Our RSI Settings

The RSI settings should be set to 5 days RSI and we are going to use the “50” level for this strategy.

The purpose of the RSI in this trading strategy is to confirm the strength of the trend:

  • When the RSI peaks above the 50 level and starts to turn down, it indicates that the uptrend (or minor rally) is weakening and it is a good time to be looking to go short
  • When the RSI bottoms below the 50 level and starts to head up, it indicates that the downtrend (or minor pullback) may be weakening and it may be a good time to look for a trade entry signal to go long

 

Simple Trading Rules of the RSI Trading System With 20 SMA – Sells

Look at the chart below to understand the trade entry rules of the 20SMA with RSI Swing Trading System.  We will be using the 20 SMA as our trading action zone:

        1. Price has to be below the 20 SMA-indicating a downtrend.
        2. Wait for price to rally back up to touch the 20 SMA line.
        3. Once 20 SMA line is touched, look down to see if the 5 day RSI has peaked  above 50 level and has started to turn down-confirming a weakening upward momentum.
        4. 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.
        5. Place Your stop loss above the high of that candlestick.

Your profit target: 3 times what you risked.

Another option would be to exit with whatever profit you have when the opposite trading signal is given (which is when a buy signal is given-this can bag you hundreds of pips easily in a nice trending market).

rsi trading system

RSI Trading System With 20 Simple Moving Average

 

RSI Trading System Buying Rules

Like many robust trading strategies, you can be both long or short the market.  Here is how to setup and manage a buying opportunity

            1. Price has to be above the 20 SMA-indicating an uptrend.
            2. Wait for price to pullback down to touch the 20 SMA line.
            3. Once 20 SMA line is touched, look down to see if the 5 day RSI has bottomed  below 50 RSI level and has started to turn up-confirming a weakening downward momentum.
            4. 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.
            5. Place Your stop loss below the high of that candlestick.
            6. Your profit target: 3 times what you risked. Another option would be to exit with whatever profit you have when the opposite trading signal is given (which is when a sell signal is given).

 

Advantages of this RSI Trading System

            • simple trading system, easy to understand and implement.
            • in a good trending market, this will be a very profitable trading system.
            • stop loss distances are quite small, thus minimizing your risks
            • this trading system has a great risk to reward ratio as well.

 

The Disadvantages

            • as with all forex trading strategies based on moving averages, this system performs really poorly in no-trending 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-you are waiting for price to come back to a 20 SMA when price may have already made a big move.

 

HOW TO IMPROVE YOUR TRADE ENTRY TECHNIQUE

Here is one really effective way to improve your trade entry technique.

How?

Buy using reversal candlestick patterns and price action that form when the price touches the 20 SMA line. Look for reversal candlesticks like:

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

Remember that all technical indicators such as the RSI and moving averages NEED price to happen first before it calculates.  Knowing how to trade price action at the 20 SMA when the RSI lines up with a trade can get you into trades earlier.

Click this link for more information on reversal candlestick chart patterns.

Here is another RSI Trading System using a 5 period moving average.

 

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