This trading strategy is ideal for traders who work full time but want to build a lucrative career as traders on the Forex or other markets, without having to sacrifice time from work or other activities.
It is a system that uses several commonly used technical indicators such as RSI, moving averages and ATR, to generate market entry and exit signals. These indicators are found in all chart 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 filter for signals and the ATR as a measure of volatility.
As always, it is recommended to test this system on a demo account before using it for real money trading. (see article on the use of demo accounts )
The general characteristics and rules of this strategy are described below:
System rules and settings
- 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 have less volatility.
- System indicators:
- 1 simple moving average of 5 periods (SMA 5)
- 1 RSI oscillator of 45 periods (RSI 45)
- 1 Average True Range de 21 periodos (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 trading.
Rules of the trading system
As we will see below, the rules of this system are mechanical and quite simple to follow. They do not require further interpretation by the trader, who only needs to be aware that a series of conditions are met (signals from technical indicators).
We open a buy position when the following conditions occur:
- The price is above the 5 SMA by 5 pips for the first time.
- The RSI is above the 50 level.
- Stop loss: It is recommended to place the stop loss 50 pips below the entry point. Another option is to place it under the last swing bass. 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.
We open a sell position when the following conditions occur:
- The price is below the 5 SMA by 5 pips for the first time.
- The RSI is below the 50 level.
- 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 high. 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.
System example with RSI and ATR
GBP / USD M30 chart with an example of a buy signal generated by this system
In the previous image we have a 30-minute chart of the GBP / USD pair with an example of a buy operation generated by this system. We can first see how the price rose and broke the SMA 5 higher by more than 5 pips, which is the first buy signal awaiting confirmation. Once RSI 45 rises and crosses the 50 level, we have the confirmation we need and open the buy position, placing a stop loss at 50 pips from the entry point.
As an indicator of volatility, the ATR can be used to determine target prices, stop losses and to determine lot size, depending on the money management rules used by the trader.
Using the ATR indicator
Each trader has their own money management strategy to determine the size of their positions. In both buying and selling operations we can use the ATR to determine the size of the lot. Lot size as part of a money management strategy is by far the most important concept in trading.
We can obtain more information about the use of the ATR as a risk control instrument in the following article: Ways to use the ATR indicator .
Based on the value of the ATR, we can decide the maximum amount of capital we are willing to lose on a trade along with the multiple of ATR used to calculate the stop loss (a good multiple of ATR is often around 2-3 ). However, it must be borne in mind that the value of the ATR may change depending on the asset analyzed, be it a stock, a commodity or a currency pair, so we cannot indicate a standard value for this indicator, only multiples.
Once you have all the aforementioned figures, the last calculation you need to do is divide the maximum amount of equity you can risk by the value of the ATR multiple to arrive at the position size you want to trade.
Are you interested in learning more about trading methodologies on the Forex and other markets? You can get more information here: Forex trading strategies