RSI Momentum is a trend-following strategy based on the RSI indicator and a small time window in the night session.
This is a long-only, short-term, trading strategy that trades on hourly bars during a small time window of the night session. It opens around two trades per week.
RSI is a price-following oscillator that ranges from 0-100. Basically, RSI is a momentum indicator which compares the relative size of an asset's recent gains to its recent losses and thereby seeks to determine if the asset is either overbought or oversold. An asset is commonly deemed to be overbought once the RSI goes above 0.70, whereas it is deemed oversold once it's below 0.30.
The AUDUSD tends to follow the trend it had during the day session into the night session. The strategy is only allowed to enter positions from 01:00 – 03:00 (GMT+1). A trend-following filter is used – we need the previous bar to close above the bar 3 periods ago. We do not want to buy low prices and therefore the RSI needs to be above 45. We do not utilize a fixed profit target, but use the RSI to determine the exit. To exit the position, the RSI needs to be above 55, or if the trade goes against us, we have set a fixed stop loss of 35 pips.
The strategy has a high win-ratio of 67% but the average winning trade is smaller than the average losing trade.
This strategy is long-only, and it could be the case that it would only be profitable if the overall trend of the AUDUSD had been upwards – but this is not the case. Below is a chart of the AUDUSD for the previous five years, and the trend is clearly down.
Graph is from www.tradingview.com
The time-window is a good portion of this strategy’s edge.
Backtest is from June 2016 to February 2018. A spread of 3 points is utilized and starting equity is 10.000.