A New Trading Strategy? Using RSI and Stoch to find Entry Points

I started my CFD Journey on Thursday using a few rules that I created for myself. I’m now interested in trying to see if I can use RSI and Stoch in combination to create an even better trading strategy for myself. My previous rules were:

  1. Only risk max 2% of my bank roll per trade.
  2. Have 0 active positions during the night (first of all, I lose sleep, second; you are charged an interest fee for leaving a leveraged product overnight.)
  3. Always trade on last month’s trend including the previous day(s). If they do not correlate, I will not trade.
  4. If one position is lost, I’ll double the amount (martingale) and do a second trade. I’ll only stop doubling after 3 consecutive losses.
  5. Do not think about lost trade opportunities.
  6. Markets to trade: Dax & Dow (minimum spread).
  7. Stay updated on economic releases prior to entering a trade.
  8. Do not have emotional ties to the money. I like to call them “points”.

Trend following has proven (historically) to be the most sound way to trade any asset. It’s indisputable. However, for CFD trading I never want to leave a trade overnight due to interest fees and sleep. It can be hard to do trend following when you have to be in and out of a trade quick. I got an idea today to try and use RSI and Stoch in combination to find the best entry points for my CFD trading. And my ultimate strategy would be to include it with my number 3 rule:

Always trade on last month’s trend including the previous day(s). If they do not correlate, I will not trade.

In combination with my new RSI and Stoch rule:

Only enter a position when an asset is overbought or oversold shown by both RSI & Stoch at the same time.

What is RSI and Stoch?

The relative strength index (RSI) is a momentum indicator developed by noted technical analyst Welles Wilder, that compares the magnitude of recent gains and losses over a specified time period to measure speed and change of price movements of a security. It is primarily used to attempt to identify overbought or oversold conditions in the trading of an asset.

Many say that an asset with an RSI above 70 is overbought (and should be sold) or if the RSI is below 30 it’s oversold (and should be bought).

The stochastic oscillator is a momentum indicator comparing the closing price of a security to the range of its prices over a certain period of time. The sensitivity of the oscillator to market movements is reducible by adjusting that time period or by taking a moving average of the result.

Asset with a stoch showing above 80 is considered overbought, and if the asset is showing less than 20 it’s considered oversold.

My mini experiment with the Dax 30 Minute Timeframe

Below is the first crossover I found where RSI and Stoch is correlating going back a few days on the Dax index. Both give a buy signal when the indicators cross their lowest horizontal lines. Then I found out that if I were to sell when either one of the indicators crosses the overbought territory I would be able to Take Profit.

Looking at the Dax index back to January 17th, I would have won six trades and lost two trades based on this strategy alone (RSI and Stoch with a 30 min timeframe). If I were to implement it with my trade following rule, I would have initiated 0 trades during this period (where both the intraday trend and the monthly trend is correlating.) I’m not sure if I’m going to follow these rules by the book, but I’m definitely going to experiment with them the following week and give you an update in my posts.

Have you tried this before? Submit a comment below and let me know how it worked for you.

My trading rules are now updated to:

  1. Only risk max 2% of my bank roll per trade.
  2. Have 0 active positions during the night (first of all, I lose sleep, second; you are charged an interest fee for leaving a leveraged product overnight.)
  3. Always trade on last month’s trend including the previous day(s). If they do not correlate, I will not trade.
  4. If one position is lost, I’ll double the amount (martingale) and do a second trade. I’ll only stop doubling after 3 consecutive losses.
  5. Do not think about lost trade opportunities.
  6. Markets to trade: Dax & Dow (minimum spread).
  7. Stay updated on economic releases prior to entering a trade.
  8. Do not have emotional ties to the money. I like to call them “points”.
  9. Only enter a position when an asset is overbought or oversold shown by both RSI & Stoch at the same time.
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