We have developed the 80-20 Trading Strategy that uses the RSI indicator, and price action analysis to land you great trade entries!
This RSI trading strategy is useful as the RSI 2 trading strategy that Larry Connor developed. However, this strategy strictly trades reversals that occur the last 50 candles.
Read the entire article for all of the trading rules and trading tips to help you trade this strategy for the highest level of success.
RSI Trading Basics:
The 80-20 RSI Trading Strategy is used as an RSI stock strategy, RSI forex strategy, and an RSI options strategy. We will discuss many things in this article like, RSI vs. stochastic indicator and why both indicators are excellent to trade with, stochastic RSI oscillator trading systems, stochastic RSI setting, five day RSI strategy, Connors RSI strategy, and binary options strategy that works with the RSI indicator.
Is RSI a Trend Indicator?
If you want the Free RSI pdf trading strategy guide to this Strategy tap here and we will give it to you for FREE.
We also will discuss an indicator we have developed that uses this strategy to give you simple entries and exit points.
This strategy will identify a break of a trend and take advantage of the movement in the opposite direction. (Kind of like our Trend Breaker Strategy)
In this article, I am going to be showing you a simple trading strategy using the RSI indicator. You are going to benefit from this strategy by learning to trade divergence and find a low-risk way to sell near the top or buy near the bottom of a trend.
What is RSI?
RSI Trading Indicator Used for Strategy
The RSI indicator is one of the most popular indicators used by traders in any market (stocks, forex, futures, options).
What is the RSI (Relative Strength Indicator)? This indicator was developed by Welles Wilder around 1978 when it quickly became one of the most popular oscillator indicators for traders in financial markets. This momentum indicator can fluctuate between 0 and 100 providing overbought and oversold signals. The formula for this indicator is a bit complex:
I could explain this whole process to you. However, I will spare you the details. I just wanted to share this with the mathematicians that are reading this who enjoy seeing equations. You can do a quick google search if you would like to learn more about this.
Forex Trading Indicator Settings
The default settings for this indicator is a smoothing period of 14. We are going to change that setting to 8. Make sure you turn this setting before you jump into this strategy. The reason I like eight rather than 14, is that the RSI will be much more responsive to us which is very important when are looking for overbought or oversold price areas. Also go ahead into the RSI setting and change the lines in the indicator to 80, 20. You will learn more about this later.
How to Trade withThe RSI Trading Indicator
This indicator will be the only indicator we use for this strategy. The reason we only use this is that we have a strict set of rules we need to follow before we can enter a trade. And these rules will, without a doubt, validate a reversal for us to open a trade.
So before you want to use this strategy make the following changes to the RSI indicator:
14 period, to 8.
70 and 30 lines, to 80 and 20.
This indicator comes standards on mostly all trading platforms. You just need to make this adjustment.
RSI Trading Strategy
Step One: Find the currency pair that is showing a high the last 50 candlesticks. (OR low depending on the trade)
The 80-20 Trading strategy can be used for any period.
The reason for that is that there are reversals of trends in every period. So this can be a swing trade, day trade, or a scalping trade. As long as it follows the rules, it is a valid trade.
The only thing we need to make sure of in this current step is that it is the low or the high the last 50 candles.
Below is an example:
Note** We will use this same example to explain this strategy. This is a USDCHF currency pair and will be a BUY trade.
Once we determine this low or high, then we can move on to the next step. I drew vertical lines on the chart so that you can see the 50 candle low that we identified.
If you need to use horizontal lines on your chart to verify that candle has closed the lowest the last 50 you can do so. This is not necessary but may be helpful for you to do and see how strong the trend is.
Step Two Using the RSI Trading Indicator:
When we find 50 candle low, it needs to be coupled with RSI reading 20 or lower. (If it’s high it needs to be combined with the RSI reading 80 or higher.)
Below we have a reading that hit the 20 line on the RSI and was the low the last 50 candles.
Once we see that we had a low, the last 50 candles AND the RSI is BELOW 20 then we can move to the next step.
Remember that this strategy is a reversal strategy. It is going to be breaking the current trend and moving the other direction.
Step Three: Wait for a second price (low candle) to close after the first one that we already identified.
The second price low must be below the first low, but the RSI Trading indicator must provide a higher signal than the first one.Remember, divergence can be seen by comparing price action and the movement of an indicator.
If the price is making higher highs, the oscillator should also be making higher highs. If the price is making lower lows, the oscillator should also be making lower lows.
If they are not, that means price and the oscillator are diverging from each other.
Which is why it’s called “divergence.”
Just because you see a divergence, it doesn’t necessarily mean you should automatically jump in with a position.
We have rules in place that will capitalize on this divergence so that we can make a significant profit.
Keep in mind, that this step may take a bit to develop. It is very important to wait for this second low because it gets you in a better position to make a trade.
This sounds a bit complex, but think of it like this for our example we are using:
Price goes down/RSI goes up. That is the Divergence.
Remember, that our example is a current downtrend looking to break to the upside. If this were a 50 candle high, we would be looking for the exact opposite of this step.
With that said, let’s take a look at our chart,
Once this criterion has been met, we can go ahead and look for entry because the charts are showing us that a reversal is soon coming.
Step Four: How to Enter the Trade with the RSI Trading Strategy
The way you enter a trade is very simple.
You wait for the price to head in the direction of the trade and wait for a candle to close above the first candle that you identified that was previous 50 candle low.
Save this picture for reference, if are struggling with this step. This will guide you when you look for a trade.
Step five: Once you make your entry, place stop loss.
To place your stop bump back 1-3 time periods and find a reasonable level to put your stop that makes logical sense. So you are looking for prior resistance, support.
We placed our stop below this support area. That way if the trend continued and did not break it could hit this level and bounce back up in our direction.
I recommend you follow at least a 1 to 3 profit vs. risk level. This will ensure that you are maximizing your potential to get the most out of this strategy. You can adjust as you wish, but most good strategies that identify breaks of a trend use a 1 to 3 profit vs. risk level.
To recap, Here are the rules of the strategy:
If you have questions or comments about this trading strategy you may reach us at firstname.lastname@example.org
If you would like to see another great strategy go ahead and check out the Parabolic SAR + Moving Average Strategy.
The RSI Trading Strategy is great and is fairly simple to learn, however counting 50 candles is a bit monotonous which is one of the many reasons why we developed the EFC indicator that trades this strategy for you!
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