This trading strategy is ideal for traders who work full time but want to build a lucrative career as traders in the Forex or other markets, without having to sacrifice time from their work or other activities.
It is a system that uses several well-known and widely used technical indicators, the RSI, the moving averages and the ATR, to generate market entry and exit signals. These indicators are found in all graphical analysis packages on the market.
In general we can say that it is a trend following system that uses a moving average to determine the direction of the trend, while the RSI serves as a signal filter and the ATR as a measure of volatility.
As always, it is recommended to test this system in a demo account before using it to trade with real money.
The general characteristics and rules of this strategy are described below:
Trading system settings and indicators
- Recommended markets: This trading methodology can be used in any market, including Forex, precious metals and indices.
- Recommended time frames: The recommended time frame for this trading system is M30 (30 minutes).
- Recommended market sessions: It can be used in all market sessions, taking into account that the Asian and Australian market sessions are slower and less volatile.
- System indicators:
- 1 5-period simple moving average (SMA 5)
- 1 RSI oscillator of 45 periods (RSI 45)
- 1 Average True Range of 21 periods (ATR 21)
Here the 5-period simple moving average acts as a trend indicator that generates buy and sell signals. These signals are confirmed by the RSI 45, which acts as a filter. The ATR 21 serves as a market volatility metric that can be used to determine the lot size used in trades.
Trading system rules
As we will see below, the rules of this trading system are mechanical and quite simple to follow. They do not require further interpretation by the trader, who should only be careful that a series of conditions are met (signals from technical indicators).
Opening of buy trades
We open a buy position when the following conditions occur:
- Price is above the SMA 5 for 5 pips for the first time.
- RSI is above level 50.
- Stop loss: It is recommended to place the stop loss 50 pips below the entry point. Another option is to place it below the last swing low. We can also use the Chandelier stop based on the ATR, to place a stop loss based on market volatility.
- Take profit: It is recommended to close the position and take profit when the price rises at least 100 pips to have a Risk:Profit ratio of 1:2.
Opening of sell trades
We open a sell position when the following conditions occur:
- Price is below SMA 5 for 5 pips for the first time.
- RSI is below level 50.
- Stop loss: It is recommended to place the stop loss 50 pips above the entry point. Another option is to place it above the last swing maximum. We can also use the Chandelier stop based on the ATR, to place a stop loss based on market volatility.
- Take profit: It is recommended to close the position and take profit when the price drops at least 100 pips to have a Risk:Profit ratio of 1:2.
Example of the trading system with the RSI and ATR
In the previous image we have a 30-minute chart of the GBP/USD pair with an example of a buy trade generated by this system. First we can see how the price rose and broke the SMA 5 higher by more than 5 pips, which is the first buy signal waiting for confirmation. Once the RSI 45 rises and crosses the 50 level, we have the confirmation we need and open the buy position, placing a stop loss 50 pips from the entry point.
As a volatility indicator, the ATR can be used to determine target prices, stops loss and to determine the lot size, depending on the money management rules used by the trader.
Uses of the ATR indicator
Each trader has his own money management strategy to determine the size of his positions. In both buy and sell trades we can use the ATR to determine the lot size. The lot size as part of a money management strategy is by far the most important concept in trading.
Based on the value of the ATR, we can decide the maximum amount of capital that we are willing to lose in a trade along with the ATR multiple used to calculate the stop loss (a good multiple of ATR is often around 2-3 ). It must be taken into account, however, that the value of the ATR can change depending on the analyzed asset, be it a share, a commodity or a currency pair, so we cannot indicate a standard value for this indicator, only multiples.
Once we calculate all the aforementioned figures, the last calculation we should do is divide the maximum amount of money we can risk by the value of the ATR multiple to obtain the position size that we can trade.