The trading system that we are going to present below is based on the use of two RSIs, as the name implies, specifically the crossings of two RSIs with different periods (One with a short period and the other with a longer period). As a filter of the signals generated by the crossings, the Fisher indicator is used, which allows having more reliable trading signals, since RSI crossings under certain market conditions can generate false signals and losses that could be avoided with the right filter.
The system itself is not complex. Long positions are opened at the RSI bullish crosses and short positions at the RSI bearish crosses. The Fisher indicator is used as a tool to confirm the different signals.
As always, it is recommended to test the system in a demo account before using it to trade with real money.
Configuration and indicators of the trading system
- 1 candlestick chart.
- One 2-period RSI is placed in the same window as a 12-period RSI.
- 1 Fisher indicator with standard configuration.
- Recommended time frame: The system was developed for 1-hour price charts, but it has the potential to be applied in other time frames, such as 5 minutes, 15 minutes, 4 hours, and even daily.
- Recommended currency pairs: The system was originally developed for EUR/USD and GBP/USD but can be used in any currency pair.
As indicated above, the Fisher indicator serves as a filter for the two RSIs crosses. To incorporate the two RSIs in the same window, on the MT4 platform we only have to apply the RSI (12) to the price chart as we would normally do, and then drag the RSI and place it in the RSI (12) window, changing the default setting to 2. In this way, we will have the lines of the two RSIs in the same window below the price chart.
The Fisher indicator can be downloaded at the following link:
Trading System Rules
The entry rules are as follows:
- Long positions: A long position is opened when the RSI (2) crosses the RSI (12) from below (bullish crossing) and continues to move higher. The Fisher indicator must be in the buy zone (green and above level 0) before, during, and after the crossing of the RSI (Filter).
- Short positions: A short position is opened when the RSI (2) crosses the RSI (12) from above (bearish crossing) and continues to move lower. The Fisher indicator must be in the sale zone (red and below level 0) before, during, and after the crossing of the RSI (Filter).
Sometimes the RSI crosses occur but before the candle ends the crossing disappears. Therefore it is recommended to wait for the signal candle to close before opening the position and entering the market.
Optional: As an additional filter the Fisher must confirm the buy/sell signal in the H4 chart.
-Stop loss: We place the stop loss at 30 pips from the entry point or above the maximum (short trades) or below the minimum (buy trades) of the price oscillation that gave rise to the entry signal.
– Profit-taking: The take profit must be at least 20 pips from the entry point. However, if a strong bullish or bearish movement is suspected, a trailing stop that follows the price at a good distance can be used.
Examples of the trading system
The above image shows an H1 price chart of the EUR/USD pair with several examples of signals generated by the system, indicated by gray boxes in the RSI window, which was placed just before the crossings. In this case, we have 2 buy signals and 1 sell signal. In the buy signals, the crossing of the RSIs occurred when the Fisher was in the buy zone (green color) while in the sell signal the crossing of the RSIs occurred when the Fisher was clearly in the selling area (red color), which means we have confirmation.
- The trader can test other filters that can also be used to improve the reliability of the signals of the RSI crossings, such as the MACD and/or the stochastic oscillator.
- Likewise, different combinations of the RSI can also be tested to find out which RSI pair produces the best results with the strategy. In this sense, backtesting with optimization can be quite useful.