The Simple oversold/overbought strategy uses Relative Strength Index to identify and trade on small price movements in a sideways market.
The logic behind this strategy is very simple. This means the strategy will perform well in sideways markets, but poorly when the market moves a lot/fast or begins to trend. It will automatically switch from long to short positions and therefore stay in the market a lot. Notice, however, that there is no stop loss.
Indicator description: Relative Strength Index (RSI)
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 the RSI reaches 30.
This strategy seeks to capture small market movements on the 5 minute chart. By buying when the RSI is below 25 and selling when it is above 75. In addition to a 30 pip (300 points) Take Profit, the strategy uses Close and Reverse, which means using opposite direction signals to close all open positions and open a new position in the opposite direction.
The strategy is by default set to trade on the DAX and may be an interesting strategy to use for inexperienced traders as it often close positions fairly quickly and is not too complex in its algorithmic rule-set for opening and closing trades.
However, it could also be set to trade on USDCAD, as these two currencies generally follow each other quite closely as the Canadian and US economies have a somewhat symbiotic relationship.
Risk management measures:
- There is a fixed max. limit of the use of margin
- Trades are only allowed to open and close within the normal trading session of the DAX. Spreads of CFDs on the DAX can widen substantially outside the trading session and create disadvantageous closing of trades.
- Only one trade is allowed to open at a time