The 20SMA with RSI swing trading system in a nice trending market can bag you hundreds of pips very easily, especially if traded on
the 4hr or daily timeframes.
Ok,the 20SMA for identifying and whether the trend is up or down and here’s how:
- when the price is above the 20sma, the market is in an uptrend.
- when the price is below the 20sma, the market is in a downtrend
What about the RSI?
The RSI settings should be set to 5 days RSI. What you need is to put in the 50-RSI Level on your chart as well.
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 (or sell, if you don’t know what short means)
- the opposite is also true…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 (long=buy, ok?)
THE TRADING RULES OF THE 20SMA WITH RSI SWING TRADING SYSTEM
Look at the chart below to understand the trade entry rules of the 20SMA with RSI Swing Trading System
When To Sell:
- Price has to be below the 20SMA-indicating a downtrend.
- Wait for price to rally back up to 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 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).
When To Buy:
The rules to enter long( or buy) are similar to the sell rules but the exact opposite.
- Price has to be above the 20SMA-indicating an uptrend.
- Wait for price to pullback down to touch the 20SMA line.
- Once 20SMA line is touched, look down to see if the 5day RSI has bottomed below 50RSI 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 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 sell signal is given).
THE ADVANTAGES OF THE 20SMA WITH RSI SWING 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 OF THE 20SMA WITH RSI SWING TRADING SYSTEM
- 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 20SMA 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 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.
Click this link for more information on reversal candlestick chart patterns.
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