Macd and rsi trading strategy

Developed by Larry Connors, the 2-period RSI strategy is a mean-reversion trading strategy designed to buy or sell strategy after a corrective period. The strategy is rather simple. Connors suggests looking for buying opportunities when 2-period RSI moves below 10, which is considered deeply oversold.

Conversely, traders can look for short-selling strategy when 2-period RSI moves above This is a rather aggressive short-term strategy designed to participate in an ongoing trend. And is not designed to identify major tops or bottoms. Before looking at the details, note that this article is designed to educate chartists on possible strategies.

We are not presenting a stand-alone trading strategy that can be used rsi out of the box. Instead, this article is meant to enhance strategy development and refinement.

There are four rsi to this strategy and levels are based on closing prices. First, identify the major trend using a long-term moving average. Connors advocates the day moving average. The long-term trend is up when a security is above its day SMA and down when a security is below its day SMA.

Macd should look for buying opportunities rsi above the day SMA and short-selling opportunities when below the day SMA. Second, choose an RSI level to identify buying or selling opportunities within the bigger trend.

Connors tested RSI levels between 0 and 10 for buying, and between 90 and for selling. Connors found that returns were higher when buying on an RSI dip below 5 than on an RSI dip trading In other words, the lower RSI dipped, the higher the returns on subsequent long positions.

For short positions, the returns were higher when selling-short on an RSI surge above 95 than on a surge above In other words, the more short-term overbought the security, the greater the subsequent returns on a short position. The third step involves the actual buy or sell-short order and the timing of its placement. Chartists can either watch the market near the close and establish a position just before the close or establish a position on the next open. There are pros and cons to both approaches.

Connors advocates the before-the-close approach. Buying just before the close means traders are at the mercy of the next open, which could be with a gap. Obviously, this gap can enhance the new position or immediately detract with an adverse price move. Waiting for the open gives traders more flexibility and can improve the entry level. The fourth step is to set the and point. This is clearly a short-term trading strategy that will produce quick exits.

Chartists should also consider a trailing stop or employing the Parabolic SAR. Sometimes a strong trend takes hold and trailing stops will insure that a position remains as long as the trend extends. Where are the stops? Connors does not advocate using stops. Yes, you read right. While the and does indeed have an upward drift, not using stops can result in outsized losses and large drawdowns.

It macd a risky proposition, but then again trading is a risky game. Chartists need to decide for themselves. The chart below shows the Dow Industrials SPDR DIA with the day SMA red5-period SMA pink and 2-period RSI. A bullish signal occurs when DIA is above the day SMA and RSI 2 moves to 5 or lower. A bearish signal occurs when DIA is below the day SMA and RSI 2 moves to 95 or higher. There were seven signals over this month macd, four bullish and three bearish.

Of the four bullish signals, DIA moved higher three of four times, which means these could have been profitable. Of strategy three bearish signals, DIA moved lower only once 5.

DIA moved above the day SMA after the bearish signals in October. Once above the day SMA, 2-period RSI did not move to 5 or lower to produce another buy signal. As far as a gain or loss, it would depend on the levels used for the stop-loss and profit taking. The second example shows Apple AAPL trading above its day SMA for most of the timeframe. There were at least ten buy signals during this period. It would have been difficult to prevent losses trading the first five because AAPL zigzagged lower from late February to mid June The second five signals fared much better as AAPL zigzagged higher from Trading to January.

Looking at this chart, it is clear that many of these signals were early. In other words, Apple moved to new lows after the macd buy signal and then rebounded.

As with all trading strategies, it is important to study the signals and look for ways to improve the results. The key is to avoid curve fitting, which decreases the odds of success in the future. As noted above, the RSI 2 strategy can be early because the existing moves often continue after the signal. The security can continue higher after RSI 2 surges above 95 or lower after RSI 2 plunges below 5.

In an effort to remedy this situation, chartists should look for some sort of clue that prices have actually reversed after RSI macd hits its extreme. This could involve candlestick analysis, and chart patterns, other strategy oscillators or strategy tweaks to RSI 2. RSI 2 surges above 95 because prices are moving up. Establishing a short position while prices are moving up can be dangerous. Chartists could filter this signal by waiting for RSI 2 to move back below its centerline Similarly when a security is trading above its and SMA and RSI 2 moves below 5, chartists could filter this signal by waiting for RSI 2 to move above This would signal that prices have indeed made some trading of short-term turn.

The chart above shows Google with RSI 2 signals filtered with a cross of the centerline There were good signals and bad signals. Notice that the October sell trading did not rsi into effect because GOOG was above the day SMA by the time RSI moved below Also note that gaps can wreak havoc macd trades.

The mid July, mid October and mid January gaps occurred during earnings season. The RSI 2 strategy gives traders a chance to partake in an ongoing trend. Connors states that traders should buy pullbacks, not breakouts. Conversely, traders should sell oversold bounces, not support breaks.

This strategy fits with his philosophy. Even though Connors' tests shows that stops hurt performance, it would be prudent for traders strategy develop an exit and stop-loss strategy for any and system. Traders could exit longs when conditions become overbought or macd a trailing stop.

Similarly, traders could exit shorts when conditions become oversold. Keep in rsi that this rsi is designed as a starting point for trading system development. Use these ideas to augment your trading style, risk-reward preferences and personal judgments. Below is code for the Advanced Scan Workbench that Extra members can copy and paste. From the creators of the RSI 2 strategy, this book details more trading strategies and includes a chapter on exits.

Trading also shows the details of his back-tests and provides guidelines to improve trading results. Market data provided by: Commodity and historical index data provided by: Unless otherwise indicated, all data is delayed by 20 minutes. The information provided by StockCharts. Trading and and in financial markets involves risk.

You are responsible for your own investment decisions. Log In Sign Up Help. Free Charts ChartSchool Blogs Webinars Members. Strategy of Contents RSI2. RSI 2 Buy Signal: Short Term Trading Strategies that Work Larry Connors and Cesar Alvarez. Sign up for our FREE twice-monthly ChartWatchers Newsletter! Blogs Art's Charts ChartWatchers DecisionPoint Don't Ignore This Chart The Canadian Technician The Traders Journal Trading Places.

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MACD and RSI trading strategy