RSI based system not working anymore | Forex Factory

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RSI based system not working anymore

  • #1
  • First Post: Mar 19, 2010 4:16pm Mar 19, 2010 4:16pm
hi,
I have been trading on this system for the past month or so ...
The rules were very simple enter long when RSI is below 25 and short when RSI is above 75...

With a few additions like modified martingale and tweaks this worked like a charm and I made over 1000 dollars from just a 200 dollar account.
Here check my trading record...
http://img146.imageshack.us/img146/9...dstatement.gif

But the past 7-10 days have been a bizzarre experience. Not only did i lose all what I earned but the system abruptly stopped working.

This is owing to the extremes to which RSI is going these days.
I traded E/U G/U U/J A/U U/Cad U/Chf using this strategy...

This is the same strategy as Eur/gbp king method.
Now there are a few questions on my mind.
1) is the method a complete failure and does this happen throughout the year or is this just for this month (since its ending of the financial year)

2) Is this something related to low volatility in general because i see the average volatility for all pairs dropped (in fx options platform and in VIX )

The normal phenomenon of bouncing to some pips on going to extremes of RSI is just not working anymore.
Price seems to happily go lower even when RSI is something like 12 ..

I have entered at RSI values like 15 and 86 and still i had to barely breakeven after a struggle ...

Can some of the experienced traders out here help me with this thing !!!
  • #2
  • Mar 19, 2010 4:41pm Mar 19, 2010 4:41pm
Quoting igauresh
hi,
I have been trading on this system for the past month or so ...
The rules were very simple enter long when RSI is below 25 and short when RSI is above 75...

With a few additions like modified martingale and tweaks this worked like a charm and I made over 1000 dollars from just a 200 dollar account.
Here check my trading record...
http://img146.imageshack.us/img146/9...dstatement.gif

But the past 7-10 days have been a bizzarre experience. Not only did i lose all what I earned but the system abruptly stopped working.

This...
This is doomed to failure with its simple entry rules...

1. Just because RSI is below 25 or above 75 does not meant it wont hit 1 or 99 and stay there for long periods of time making your SL's take a hit.
2. In some cases you will be buying weakness and selling strength. see 1 above.
3. RSI's are well known for giving misleading market signals especially if you use a low RSI period due to price spikes etc.
4. You also need to take into account the currencies trend. If it is up and RSI reads 75 then the chances of it reversing are not very great.

Hope this helps.

Scoobs.
  • #3
  • Mar 21, 2010 1:41pm Mar 21, 2010 1:41pm
Well thanks for the reply but i havent seen RSI go to that extremes for like 2 months... so if suddenly it is going that way then i thought someone who has been trading with RSI can have an explanation..
Like one which i feel is right is the decrease in VIX and implied volatility of all pairs... This has got to have some explanation ...

The price action is definitely different from what i was seeing for the past 2-3 months and i feel that some more inputs will definitely help this cause...

Gauresh.
  • #4
  • Mar 21, 2010 1:50pm Mar 21, 2010 1:50pm
Quoting igauresh
Well thanks for the reply but i havent seen RSI go to that extremes for like 2 months... so if suddenly it is going that way then i thought someone who has been trading with RSI can have an explanation..
Like one which i feel is right is the decrease in VIX and implied volatility of all pairs... This has got to have some explanation ...

The price action is definitely different from what i was seeing for the past 2-3 months and i feel that some more inputs will definitely help this cause...

Gauresh.
Forex markets change, a system can work fine for several months and then start to lose money when the market goes through a pattern change etc.

I dont know what currencies you are trading but if you take EUR then these have changed considerably due to Hedge Funds betting against the euro etc.

Scoobs.
  • #5
  • Mar 21, 2010 3:35pm Mar 21, 2010 3:35pm
itīs remember me.
When i traded on a first day, with a demo account (U$5000).

Just with line chart, without any indicators.
With a rookie lucky, I did 1000 dollars.
I thought: "wow, iīll be rich easily!"

In the second day, i loose that money "earned".

So we continuously may keep studying, learning and trying to achieve a
greater winning ratio.
  • #6
  • Mar 21, 2010 3:57pm Mar 21, 2010 3:57pm
To succeed in FOREX you must use an unorthodox approach. When will traders learn that indicators do not work? It's all about price action!! It really is.
  • #7
  • Mar 21, 2010 4:15pm Mar 21, 2010 4:15pm
I have an EA that trades with RSI exactly the same way. In a week from monday till thursday it turned 400$ to 2,500$, and bang by friday GBPUSD decided to trend a little and it wasted it down to 550$

so I started looking for a way to filter or know when its going to trend so it should not trade but I could not, I think I asked some coders for help but to no avail, so I dumped it.

You will only have a degree of success with EURGBP because it ranges mostly, any of the trending pairs, no go area, it will surely build it up and one morning its judgement day for the account

kos
John 3:16 - From THIS love no power on earth can me sever.
  • #8
  • Edited 5:00pm Mar 21, 2010 4:23pm | Edited 5:00pm
If you want to continue down this route then.....

Go Long or BUY
- RSI(3) is < 20 in M15 and H1 and H4 timeframes
- Trend is UP in D1 i.e. 2 EMA > 20 EMA > 200 EMA

Go Short or SELL
- RSI(3) is > 80 in M15 and H1 and H4 timeframes
- Trend is DOWN in D1 i.e. 2 EMA < 20 EMA < 200 EMA

Set your TP=40 and SL=20

Use only trending pairs and never ones that range like EURCHF or EURGBP.

Scoobs.
  • #9
  • Mar 21, 2010 4:38pm Mar 21, 2010 4:38pm
Quoting igauresh
hi,
I have been trading on this system for the past month or so ...
The rules were very simple enter long when RSI is below 25 and short when RSI is above 75...

With a few additions like modified martingale and tweaks this worked like a charm and I made over 1000 dollars from just a 200 dollar account.
Here check my trading record...
http://img146.imageshack.us/img146/9...dstatement.gif

But the past 7-10 days have been a bizzarre experience. Not only did i lose all what I earned but the system abruptly stopped working.

This...
Your system works in a ranging market. Given that the market started trending some days ago, it will eat your profits. But given that the market trends only about 30% of the time, you'll be able to make it back later on. Just wait for the trend to end.
  • #10
  • Mar 21, 2010 4:46pm Mar 21, 2010 4:46pm
Quoting scooby-doo
If you want to continue down this route then.....

Go Long or BUY
- RSI(3) is < 20 in M15 and H1 and H4 timeframes
- Trend is UP

Go Short or SELL
- RSI(3) is > 80 in M15 and H1 and H4 timeframes
- Trend is DOWN

Set your TP=40 and SL=20

Use only trending pairs and never ones that range like EURCHF or EURGBP.

Scoobs.
coming from you I will look for MultiTimeFrame rsi that I can overlay on 15min chart and try this out. and if its ok, I will adjust the EA, at least for backtesting purposes for now and if ok to demo, then what

thanks sir

kos
John 3:16 - From THIS love no power on earth can me sever.
  • #11
  • Mar 21, 2010 4:58pm Mar 21, 2010 4:58pm
Quoting Intensity
Your system works in a ranging market. Given that the market started trending some days ago, it will eat your profits. But given that the market trends only about 30% of the time, you'll be able to make it back later on. Just wait for the trend to end.
that is if the equity still remains till the next ranging time. sometimes RSI can remain under/above for 3 days before coming out again

and sometimes when it starts ranging again it may not be at the same level it was before and as its ranging it will be moving away from your entry point for a long period even months.

the closest solution is to create channel for price with MA and if its within then trade like that and once it breakout of the channel then follow the trend.

that your way of trading RSI is mostly a counter trend trade, that is why when trend starts its always disastrous

kos
John 3:16 - From THIS love no power on earth can me sever.
  • #12
  • Mar 21, 2010 7:13pm Mar 21, 2010 7:13pm
The number 1 rule of oscillators:
-It is a supplicant to basic trend analysis. Relying solely on oscillators to generate signals = doom

In a trending market, you do not use oscillator based strategies.
In a sideways market, you do not use trend following strategies.

If you look at the longer time frame charts (daily and weekly), you will find that there are very clear trendlines/support/resistance. The prices obey trendlines/support/resistance more than they obey oscillators.

Just wait a little while more for the market to make up its mind on where it wants to go then you should find your osccillator strategy work again.
  • #13
  • Mar 22, 2010 3:31am Mar 22, 2010 3:31am
Hi igauresh,

if my memory is correct, in Welles Wilder's book which he described his RSI indicator, not a lot of weight is given to the values on the band. The most common application of RSI according to him were,

1. Divergence
2. Chart patterns not obvious on the chart.
3. Support and resistance zones.

There should be more, but its been years since I read that book.

The values in the RSI indicator only compliments the above interpretations as they are possible oversold and overbought areas. Used together, they should give you a high probability setup. Eg, a divergence below the 75 line is not as strong as a divergence above the 75 line.

regards
  • #14
  • Mar 22, 2010 3:53am Mar 22, 2010 3:53am
You are trading a Range bound oscillator (RSI) in an trending market. You need the skills to identify trending markets, use a trending indicator, and/or learn price action.
  • #15
  • Mar 22, 2010 6:15am Mar 22, 2010 6:15am
Quoting Jhig
You are trading a Range bound oscillator (RSI) in an trending market. You need the skills to identify trending markets, use a trending indicator, and/or learn price action.

Agreed, but you can still use rsi in a trending market....once you have identified the trend simply use rsi as an entry...lets say you are in an up trend, you simply take the buy signals from rsi and ignore the sell signals, oposite for a down trend, BUT you must first identify market conditions.
Seek not to change the world; seek only to change your mind about the world
  • #16
  • Mar 22, 2010 6:28am Mar 22, 2010 6:28am
Intensity and Jhig said it right, and this is the best answer. Buying when an oscillator is low and selling when high works in a ranging market, but is the exact opposite of what you want to do in a trending market.

Rob
  • #17
  • Mar 22, 2010 8:22am Mar 22, 2010 8:22am
hi,
I really appreciate the replies in this thread and the trouble that all you people took in helping me out... It seems I will have to make some changes in my strategy..
The trending and ranging model is a good way to classify markets...
I will be looking for some indicator to filter out the market sentiment before entering the trades or something similar to this strategy...
Lets see whats in store for me ...

But still thanks a lot to each person who added valueable information to this thread.

I am still lacking inputs on implied volatility.. if anyone knows how that can be used to identify ranging and trending markets...

Gauresh
  • #18
  • Mar 22, 2010 10:46am Mar 22, 2010 10:46am
If all you needed to do in order to profit from trades was look at one measly indicator, then everyone would be turning to Forex.

Not even 5 different indicators studied over multiple time frames can accurately tell you where the price is going.

It takes more than just technical signals to trade successfully.
  • #19
  • Mar 22, 2010 12:15pm Mar 22, 2010 12:15pm
Take a look at this, it might help, it might not, but it's worth reading if you want to use the RSI.
Attached File(s)
File Type: pdf RSI_Trend_Determination.pdf   560 KB | 941 downloads
  • #20
  • Mar 23, 2010 5:02pm Mar 23, 2010 5:02pm
Quoting igauresh
With a few additions like modified martingale and tweaks this worked like a charm and I made over 1000 dollars from just a 200 dollar account.
The biggest problem you have is not your RSI-based strategy's inability to cope with trending markets. It's the martingale.

With martingale:
-- In a winning sequence of trades, you win 1,1,1,1,1,1, .....
-- In a losing sequence, you lose 1,2,4,8,16,32, ...... (or less, in a 'modified' martingale, but the principle remains the same)

The large downward spikes in your equity curve illustrate exactly this point - a very slow climb upward, and a fast drop downward.

Any losing sequence that's long enough will always bring your account balance back to zero, no matter how profitable (or otherwise) your RSI-based strategy is.
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