Trading Strategy Using Moving Averages and RSI

In today's post, we shall discuss one trading strategy which make use of the Moving Averages and the RSI. Before we move on further, I would like anyone who is following the blog now and who have not read the Risk Disclosure Statement to read it now.

Currency Pair: Any
Time Frame: H1, H4, D1, (D1 preferred, you only need to check the chart once daily)
Indicator Used: 7 EMA (Red), 14 EMA (Yellow), 21 EMA (Blue), RSI(14) (Lime)

The steps involved in preparing the chart for trade is as follow: -
1. Plot the 3 moving averages on the currency chart.
2. Plot the RSI(14) on the chart's indicator window with levels 45 and 55 mark out.

The following Entry Rules are to be observed when taking trade using this strategy: -

LONG ENTRY CONDITION
1. When the 7 EMA cross up the 14 EMA and continue to cross up the 21 EMA
2. RSI(14) > 55
3. The last bar has to be bullish
4. Go Long at the closed of the current Daily bar ONLY if No.1, 2 & 3 are met

SHORT ENTRY CONDITION
1. When the 7 EMA cross down the 14 EMA and continue to cross down the 21 EMA
2. RSI(14) < 45
3. The last bar has to be bearish
4. Go Short at the closed of the current Daily bar ONLY if No.1, 2 & 3 are met

The following Exit Rules are to be observed when taking trade using this strategy: -
1. To exit the trade when then 7 EMA cross up (for Short Trade) or cross down (for Long Trade) the 14 EMA

The above was a EURGBP trade which started on 17/May/2009 and ends on 02/July/2009. The trade net a total of +300 pips.

The advantages to this trading strategy are: -

1. It is to use and implement.
2. You only need about 15 minutes a day to check the chart.
3. It gives good trade in a trending market, big price move or breakout.

The disadvantages to the strategy are: -

1. Moving averages and RSI are lagging indicators, and so they might not indicate real future market movement. They only indicate past trend.
2. This strategy does not work well with consolation market conditions, which might give a lot of false trigger.

So Why am I discussing this strategy as it seems from the disadvantages, this strategy is not one of foolproof. The reason why I am discussing this strategy is that it is a easy to use and implement strategy, and due to the nature of the disadvantages stated, there is a need to put in a stop-loss.

Starting from the next post, I will start to discuss on the concept money mangement, risk to reward ratio which will lead to the use of stop-loss and take-profit.

So, Stay with me...