Rsi sma strategy

Developed by Larry Connors, the 2-period RSI strategy is a mean-reversion trading strategy designed to buy or sell securities after a corrective period. The strategy is rather simple. Connors suggests looking for buying opportunities when 2-period RSI moves below 10, which is considered deeply oversold. Conversely, traders can look for short-selling opportunities when 2-period RSI moves above 90. This is a rather aggressive short-term strategy designed to participate in an ongoing trend. It is not designed to identify major tops or bottoms. Before looking at the details, note that this article is designed to educate chartists on possible strategies. We are not presenting a standalone trading strategy that can be used right out of the box. Instead, this article is meant to enhance strategy development and refinement.
There are four steps to this strategy and levels are based on closing prices. First, identify the major trend using a long-term moving average. Connors advocates the 200-day moving average. The long-term trend is up when a security is above its 200-day SMA and down when a security is below its 200-day SMA. Traders should look for buying opportunities when above the 200-day SMA and short-selling opportunities when below the 200-day SMA.
Second, choose an RSI level to identify buying or selling opportunities within the bigger trend. Connors tested RSI levels between 0 and 10 for buying, and between 90 and 100 for selling. Connors found that returns were higher when buying on an RSI dip below 5 than on an RSI dip below 10. In other words, the lower RSI dipped, the higher the returns on subsequent long positions. For short positions, the returns were higher when selling-short on an RSI surge above 95 than on a surge above 90. In other words, the more short-term overbought the security, the greater the subsequent returns on a short position.
The third step involves the actual buy or sell-short order and the timing of its placement. Chartists can either watch the market near the close and establish a position just before the close or establish a position on the next open. There are pros and cons to both approaches. Connors advocates the before-the-close approach. Buying just before the close means traders are at the mercy of the next open, which could be with a gap. Obviously, this gap can enhance the new position or immediately detract with an adverse price move. Waiting for the open gives traders more flexibility and can improve the entry level.
The fourth step is to set the exit point. In his example using the S&P 500, Connors advocates exiting long positions on a move above the 5-day SMA and short positions on a move below the 5-day SMA. This is clearly a short-term trading strategy that will produce quick exits. Chartists should also consider setting a trailing stop or employing the Parabolic SAR. Sometimes a strong trend takes hold and trailing stops will ensure that a position remains as long as the trend extends.
Where are the stops? Connors does not advocate using stops. Yes, you read right. In his quantitative testing, which involved hundreds of thousands of trades, Connors found that stops actually “hurt” performance when it comes to stocks and stock indices. While the market does indeed have an upward drift, not using stops can result in outsized losses and large drawdowns. It is a risky proposition, but then again trading is a risky game. Chartists need to decide for themselves.
Trading Examples.
The chart below shows the Dow Industrials SPDR (DIA) with the 200-day SMA (red), 5-period SMA (pink) and 2-period RSI. A bullish signal occurs when DIA is above the 200-day SMA and RSI(2) moves to 5 or lower. A bearish signal occurs when DIA is below the 200-day SMA and RSI(2) moves to 95 or higher. There were seven signals over this 12-month period, four bullish and three bearish. Of the four bullish signals, DIA moved higher three of the four times, which means these signals could have been profitable. Of the three bearish signals, DIA moved lower only once (5). DIA moved above the 200-day SMA after the bearish signals in October. Once above the 200-day SMA, the 2-period RSI did not move to 5 or lower to produce another buy signal. As far as a gain or loss, it would depend on the levels used for the stop-loss and profit taking.
The second example shows Apple (AAPL) trading above its 200-day SMA for most of the timeframe. There were at least ten buy signals during this period. It would have been difficult to prevent losses on the first five because AAPL zigzagged lower from late February to mid-June 2011. The second five signals fared much better as AAPL zigzagged higher from August to January. Looking at this chart, it is clear that many of these signals were early. In other words, Apple moved to new lows after the initial buy signal and then rebounded.
As with all trading strategies, it is important to study the signals and look for ways to improve the results. The key is to avoid curve fitting, which decreases the odds of success in the future. As noted above, the RSI(2) strategy can be early because the existing moves often continue after the signal. The security can continue higher after RSI(2) surges above 95 or lower after RSI(2) plunges below 5. In an effort to remedy this situation, chartists should look for some sort of clue that prices have actually reversed after RSI(2) hits its extreme. This could involve candlestick analysis, intraday chart patterns, other momentum oscillators or even tweaks to RSI(2).
RSI(2) surges above 95 because prices are moving up. Establishing a short position while prices are moving up can be dangerous. Chartists could filter this signal by waiting for RSI(2) to move back below its centerline (50). Similarly, when a security is trading above its 200-day SMA and RSI(2) moves below 5, chartists could filter this signal by waiting for RSI(2) to move above 50. This would signal that prices have indeed made some sort of short-term turn. The chart above shows Google with RSI(2) signals filtered with a cross of the centerline (50). There were good signals and bad signals. Notice that the October sell signal did not go into effect because GOOG was above the 200-day SMA by the time RSI moved below 50. Also, note that gaps can wreak havoc on trades. The mid-July, mid-October and mid-January gaps occurred during earnings season.
Conclusions.
The RSI(2) strategy gives traders a chance to partake in an ongoing trend. Connors states that traders should buy pullbacks, not breakouts. Conversely, traders should sell oversold bounces, not support breaks. This strategy fits with his philosophy. Even though Connors' tests show that stops hurt performance, it would be prudent for traders to develop an exit and stop-loss strategy for any trading system. Traders could exit longs when conditions become overbought or set a trailing stop. Similarly, traders could exit shorts when conditions become oversold. Keep in mind that this article is designed as a starting point for trading system development. Use these ideas to augment your trading style, risk-reward preferences, and personal judgments. Click here for a chart of the S&P 500 with RSI(2).
Suggested Scans.
RSI(2) Buy Signal.
This scan searches for stocks that have just had an RSI(2) Buy Signal.
RSI(2) Sell Signal.
This scan searches for stocks that have just had an RSI(2) Sell Signal.
Further Study.
From the creators of the RSI(2) strategy, this book details more trading strategies and includes a chapter on exits. Connors also shows the details of his back-tests and provides guidelines to improve trading results.

20 SMA With RSI Forex Trading Strategy.
The 20 SMA with RSI forex trading strategy is also a very simple forex trading strategy which beginner forex traders can find very easy to use.
Currency Pair: Any.
Indicators: RSI (set period settings to 5) & 20 SMA.
WHAT IS THE PURPOSE OF 20 SMA?
The 20 SMA for identifying and whether the trend is up or down and here’s how:
if the price is above the 20 sma, the market is in an uptrend. if the price is below the 20 sma, the market is in a downtrend.
WHAT IS THE PURPOSE OF RSI?
Its purpose is to confirm the strength of the trend.
you also need to set the 50 RSI level on your chart 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 for a sell signal to trade. 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 buy.
TRADING RULES OF THE 20 SMA WITH RSI FOREX TRADING STRATEGY.
Refer to the chart below for the trading rules:
Price has to be below the 20 SMA-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 5 period RSI has peaked above 50 level 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).
Price has to be above the 20 SMA-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 5 period RSI has bottomed below 50 RSI 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).
DISADVANTAGES OF THE 20SMA WITH RSI FOREX TRADING STRATEGY.
as with all forex trading strategies based on moving averages, this strategy performs really poorly in flat or ranging markets. sometimes price may not rally or pullback to touch the 20 SMA 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.
ADVANTAGES OF THE 20 SMA WITH RSI FOREX TRADING STRATEGY.
this is a trend trading strategy and in a good trending market, will work really well which has the potential to make you a lot of profitable pips. the use of forex reversal candlestick patterns would greatly enhance the entry signals so you should learn about how you can incorporate them into this trading strategy.
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5×5 RSI Trading System – Complete Trading Details.
Posted by D 273 days ago.
The RSI trading indicator is a price momentum measure that also uses overbought and oversold zones to show when markets may be overextended. It makes up many trading methods and we are going to use it with our 5×5 RSI Trading System.
RSI = Relative Strength Index.
The RSI, although referred to as “index” is not really an index so the name is a little misleading.
Just think of the RSI indicator as an oscillator that measures momentum over a set period (look back period) and will indicate when the momentum has pushed price to far in one direction (oversold/overbought).
Oversold And Overbought.
Oversold is a term that is used when price is deemed to have fallen a certain distance away from the average price. This is a condition that is measured by the RSI dipping below level 30 on the indicator and is used in conjunction with a trading setup, usually a buy signal.
Overbought is the opposite of oversold.
When price has risen a distance from the average price, it can be deemed to be overbought and the RSI will be above the 70 level . Depending on the trading system, when the RSI is above the 70 level, the strength of price is considered to have been strong and a reversion is expected. This will set up a sell signal for most RSI trading systems.
What Does “5X5” Stand For?
Quite simply, it makes up the settings for the two trading indicators that will be used in the strategy:
5 period lookback setting for RSI – We will use levels 30,50,70. 5 period simple moving average (SMA)
Other initial details about the trading strategy:
Time Period – Any time frame can be used including short term for day trading or longer term charts for a swing trading approach with the 5X5 RSI trading system.
Currency Pairs – You can use any Forex pair you like however keep spread costs in mind if considering trading the exotic currencies.
How To Trade The 5X5 RSI Trading System – Forex Example.
Here are a few notes before you get to the rules of the Forex trading system:
the 5 SMA Indicator is for determining trend direction if the price is is above the 5 sma, it is deemed an uptrend or downtrend if price is below the 5sma. the RSI is used as a confirmation.
Here is a sample buy signal.
RSI TRADING SYSTEM – BUY SIGNAL SETUP.
Price closes above the 5 period SMA and is an obvious bullish candlestick RSI is above the 50 level. If this is the first cross over after a downtrend, that’s even better. Place a buy stop above the bull candle Place your stop loss about 5 pips below the low of the candlestick depending how your risk parameters. You can set profit targets, trail stop once price moves in your favor. Many ways to take profits.
The sell signal is opposite that of the buy set up just discussed.
RSI trading method short trades.
Price closes below the 5 period SMA and is an obvious bearish candlestick RSI is below the 50 level. If this is the first cross over after an uptrend, that’s even better. Place a sell stop below the bear candle Place your stop loss about 5 pips above the high of the candlestick depending how your risk parameters. You can set profit targets, trail stop once price moves in your favor. Many ways to take profits.
Using RSI To Trade – Important Points About This System.
Remember that the RSI is a trading indicator, will lag price, and although objective, price action trading can help improve this system. Using price movement, especially how strong the candlestick closes, can bump up the edge you can have. You want to see strong closes or, as shown in the sell signal at #1, using price patterns such as inside bars and break from compression can help improve the system.
If you chose to take more trades after the original trend change trade, you may want to see that the RSI indicator has dipped into oversold or overbought territory. This often times will set up a pullback in the price that can aid in triggering another trade depending on how deep price moves.
Use stop orders for your entries as this will show that at least in the short term, momentum is in your favor.
There may be times that the candlestick that gives the buy or sell signal is quite large. Either reduce position size or wait until there is a pause or retrace in price.
There will be times that the RSI flips back and forth over the 50 line. This indicates choppy price action and you may want to highlight that price action with lines to show a pattern break.
RSI AND CHOPPY PRICE ACTION.
Regardless of the time period you trade, you will run into issues such as price action that indicates chop. You do not want to implement this strategy during those times. Use standard price patterns to contain price movement and wait for the break of the price pattern to occur.
Once the break occurs, return back to the rules for the RSI trading system.

5 SMA With 5 RSI Forex Trading Strategy.
The 5 SMA with 5 RSI Forex Trading Strategy is another simple forex strategy that beginner forex traders can find it easy to implement.
Forex Indicators: 5 SMA and RSI period settings at 5.
Brief Overview:
The 5SMA Indicator is for determining trend so if the price is is above the 5 SMA, it is an uptrend or downtrend if price is below the 5 SMA. The RSI is used as a confirmation signal. The RSI is a technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions. The RSI ranges from 0 to 100. A currency pair is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback its time to look for a sell opportunity. On the other hand, if RSI approaches 30, it is an indication that the currency pair may be getting oversold and therefore likely to rally so its time to be looking for a buy opportunity.
5 SMA WITH 5 RSI FOREX TRADING STRATEGY RULES.
Refer to this chart for how to buy and sell using this strategy. The rules are below this chart:
Buying Rules:
When price crosses over 5 SMA to the upside and that candlestick closes, check to make sure that it is more than + 10 pips up Then check the RSI, it must be above RSI 50 line. Buy at market or place a buy stop order 2-5 pips above the high of the candlestick Place your stop loss about 5 pips below the low of the candlestick. Set take profit 3 times what your risked initially or there is a previous swing high you can spot, then place your take profit target there.
Sell Rules:
When price crosses over 5 SMA to the downsdie and that candlestick closes, check to make sure that it is more than + 10 pips down Then check the RSI, it must be below RSI 50 line. Buy at market or place a buy stop order 2-5 pips above the high of the candlestick Place your stop loss about 5 pips below the low of the candlestick. Set take profit 3 times what your risked initially or there is a previous swing high you can spot, then place your take profit target there.
DISADVANTAGES OF THE 5 SMA AND 5 RSI FOREX TRADING STRATEGY.
As usual, every forex trading strategy has it weakness:
SMA’s are lagging forex indicators which means that this forex trading strategy will generate too many false trading signals in flat or non-trending market. Sometimes, the breakout candlestick may be too long, which may mean that your stop loss would be quite large.
ADVANTAGES OF THE 5 SMA AND 5 RSI FOREX TRADING STRATEGY.
A very simple forex trading strategy that comes with an easy to spot trading setups which are easy to execute. This is a trend trading forex strategy so if you can catch the beginning of a trend with the trading strategy and if you trail stop your trades, you can easily make 100+pips easily if you are trading on larger timeframes like 1hr, 4hr or daily.
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