In this article we are going to talk about a simple trading strategy based on the RSI oscillator and three moving averages (SMA and EMA). This strategy will also help us understand how the RSI, one of the most powerful technical indicators, works.
This is a relatively simple scalping strategy designed to operate in 5-minute time frames in the most liquid currency pairs (EUR/USD, USD/JPY and GBP/USD).
Strategy configuration
- Currency pairs: EUR/USD, GBP/USD and USD/JPY.
- Recommended timeframe: 5 minutes
- An RSI with standard configuration (14 periods)
- An exponential moving average (EMA) of 21 periods
- A simple moving average (SMA) of 7 periods
- And finally a simple moving average of 4 periods
All indicators should be calculated with the closing price. If we have configured the price chart correctly it will look like this:
Trading strategy rules
Buy signals
We open a buy position when the following conditions are met:
- The RSI must exit the oversold condition and cross the 50 level (centerline) in the bullish direction.
- The 4-period SMA must cross the 7-period SMA upwards (bullish cross).
- The entry of the buy position is confirmed at the time the price closes above the 21-period EMA.
-Stop loss: The Stop Loss can be placed under the EMA of 21 periods or in the most recent minimum.
-Take Profit: The TakeProfit is calculated with respect to the size of the StopLoss in a ratio of 1 to 1. If the stoploss is 30 pips, then the minimum Take Profit will be 30 pips.
Sell signals
We open a sell position when the following conditions are met:
- The RSI must exit the overbought condition and cross the 50 level (centerline) in the bearish direction.
- The 4-period SMA must cross the 7-period SMA downwards (bearish cross).
- The entry of the sell position is confirmed at the time the price closes below the 21-period EMA.
-Stop loss: The Stop Loss can be placed above the EMA of 21 periods or in the most recent maximum
-Take Profit: The TakeProfit is calculated with respect to the size of the StopLoss in a ratio of 1 to 1. If the stoploss is 30 pips, then the minimum Take Profit will be 30 pips.
