Trading forex with the moving average and RSI strategy can help traders to spot overbought and oversold market conditions in line with the overall trend. This means that we can carefully time our entry into established trends when there is a pullback, rather than buying at the top or selling at the bottom. If you combine these 2 popular forex indicators with other forms of market analysis, you have a solid forex trading strategy which can catch some big market moves with practice.
What is the RSI and moving average strategy?
The purpose of this forex strategy is for us to find currency pairs where there is an established trend and the ample opportunity for us to enter this trend. By combining multiple technical indicators along with price action analysis, we can potentially increase trade probabilities and reduce false signals.
The moving average will do the job of identifying the trend direction. Price above the moving average would suggest an uptrend, whereas price below the moving average would suggest a downtrend. We can use double moving averages crossovers to emphasise the current strength of a trend.
The RSI indicator will be used to decide when we will look to place an order in line with the trend direction. If the RSI indicator is not in an extremely overbought or oversold level, there may still be momentum left in the trend. The strategy will also look at RSI divergence as an additional filter to give us that extra edge.
We will also use price action analysis to look for key price levels including support and resistance. The entry can be further confirmed with candlestick patterns. We want as much confirmation for trades as possible without confusing ourselves.
Buy signal
- 50 SMA is above 200 SMA
- RSI is extremely oversold
- RSI divergence to the upside
- Bullish price action
In the EUR/USD 1-hour chart below, you can see that the 50 moving average is above the 200 moving average. This is known as the golden crossover and is a very bullish market signal. The RSI (14) is below the 30 level which suggests the market is oversold. We also have some bullish candlestick patterns including hammer stick formations. These are all strong indicators that we are going to see a continuation of the uptrend, which is the case. We could have placed the stop loss just below the 200 SMA which is around 20 pips. Price shot up over 530 pips which would have given us ample opportunity to take profits along the way. If we used the 200 SMA as a trailing stop, this would have seen a good gain of around 330 pips which is a very favourable risk to reward ratio and not bad for 10 days trading.
Sell signal
- 50 SMA is below 200 SMA
- RSI is extremely overbought
- RSI divergence to the downside
- Bearish price action
The logic for a sell trade is basically the opposite of a buy trade. In the EUR/USD 1-hour chart below, you can see that all of the conditions of the moving average and RSI strategy for a sell signal have been met. We have the 50 SMA below the 200 SMA, which is known as the death crossover and is a strong indicator of a downtrend. The RSI indicator is close to the overbought area whilst price is struggling to breach the resistance level that is holding firm. You can also see some RSI divergence to the downside for further confirmation. This is followed by a big red engulfing bar and consecutive red bars establishing the sellers are winning the battle. Price then fell over 500 pips. We could have placed out stop loss just above the recent high which would have only been around 15 pips. If the 50 SMA was used as a trailing stop, this trade could have made around 420 pips in just over a week.
Moving average RSI strategy Pros & Cons
Pros
- Catch some big market moves
- Time entry into an emerging trend
- Can be used on any currency pair and chart timeframe
- Indicators are free to use with customisable settings
Cons
- Requires the user to time entry and exit
- Takes time to learn how to spot buy and sell signals
- There will be false signals
- Need sensible money management
RSI vs moving average
The RSI and moving average are two of the most popular yet simple forex trading indicators that you will come across. The main purpose of the moving average is to show you the trend direction of a currency pair. The RSI on the other hand, can show you overbought and oversold market conditions where price may turn around. This means that they can compliment each other well as we can trade in the direction of the overall trend during an extreme pullback. However, I personally find there to be many false signals from both indicators which is why I would only implement them as an additional filter as part of a more complete forex strategy.
Conclusion: is the RSI and moving average strategy any good?
Yes, I think this is a solid forex trading strategy. The moving averages can do a good job spotting trends whereas the RSI can pin point possible entry points. However, it does require you to look at price action for confirmation. You will also need good forex money management and trading discipline.
I have seen the same forex strategies give a completely different set of results simply because of the stop loss and take profit levels being used. If your stop loss is too wide, it might wipe out all of your gains. If you have a tight stop loss with a higher take profit, you can recover from bad trades quicker and still make some pips even with a lower win rate.
Perhaps give the moving average and RSI strategy a try on a demo account at first to see how things go. This can be a great way to practice your trading skills without taking any risk. You can get a free demo account from most forex brokers and build up your confidence until you start seeing consistent results.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.
