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 (simple moving average) 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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