It is nothing fancy, just a really simple trading system that is entirely based on the RSI Indicator. The RSI is used here to determine oversold and overbought conditions.
So what about the candlestick then? Well, the candlestick in actual fact must be a reversal candlestick.
Here’s how it works in short:
- if RSI is in the oversold region and starts to head up past the 30 level, you need to look for a bullish reversal candlestick pattern. That is your buy signal.
- If RSI is in the overbought region and starts crossing the 70 level down, you need to start looking for a bearish reversal signal candlestick. That your sell signal.
I told you its so simple.
Ok, next question…what types of bearish and bullish reversal candlesticks can you use? Well, if you go to this post here: top 10 forex reversal candlestick patterns, you’ll get what you want and use that in this trading system.
Right, lets get straight to the buying and selling rules…
- RSI indicator must cross from the bottom of 30 level and up above it.
- once that happens, you wait to see if a bullish reversal candlestick forms, like a pin bar, insider bar etc.
- Place a pending buy stop order 2 pips above the high of the bullish reversal candlestick
- place stop loss at lest 2 pips below the low of that bullish candlestick but if you think that the stop loss is too close to the entry price, move it a bit further away or otherwise, use the nearest swing low (if that is not too far away).
- use previous swing high as your take profit target level.
- RSI indicator must cross down 70 level from the top and go below it.
- once that happens, you wait to see if a bearish reversal candlestick forms, like a shooting star, insider bar etc.
- Place a pending sell stop order 2 pips below the low of the bearish reversal candlestick
- place your stop loss order at lest 2 pips below the low of that bearish candlestick but if you think that the stop loss is too close to the entry price, move it a bit further away or otherwise, use the nearest swing high (if that is not too far away).
- use previous swing low as your take profit target level.
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