Trading Strategy 201: Using the SMA and RSI

Trading should come easily without a sweat. People lose out of trades because they aren’t diligent. Diligence requires you follow the precepts else you pay dearly for it. Breaking rules may not hurt on a first trial but in the long run, it will fade you out.

This being the first of the series of trading strategies will expose you to breakouts, trends, reversals, and retracements.

If you already understand my plea and want to move on, then wait no more. Let’s get started!

For the purpose of this training, I will be using tradingview.

 

Fixing the SMA

We will be using two simple moving averages. The first will be of 20 period and the second of 50 period.

1 Select the indicator/fundamental icon.

2 Select ‘Built-ins’, scroll to ‘Moving Average’ and select it.

3 Select the ‘Format’ icon to set the moving average. Change the length (period) to 20. Leave other parameters. You can also select ‘Style’ to change the color and thickness.

4 Repeat same for the 50 SMA, but remember to use different colors. I used red for 20 SMA and blue for 50 SMA.

 

Fixing the RSI

Here we will be using the default which is 14.

1 Select the indicator/fundamental icon.

2 Select ‘Built-ins’, scroll to ‘Relative Strength Index’ and select it.

3 Adjust the vertical scale of the RSI to show the 50 mark (left click and hold, then move the mouse up or down till the 50 mark appears).

 

Trading Strategy

This strategy is very simple to follow.

1 Wait for the 20 SMA to cross the 50 SMA

2 On confirmation of the uptrend, the RSI will be above the 50 mark

Sometimes the candlestick may be above the 50 SMA and the RSI above the 50 mark, but like I earlier said, it’s always better to wait and confirm the move before jumping in.

Now that’s ‘Riding the Trend’. Riding the trend is vital with less headache.

 

Advanced Confirmation

Another confirmation in addition to the above is a divergence. This may be a little advanced but with time you will get a hang of it.

How to spot a divergence

This will occur before the cross of the 20 SMA above 50 SMA. Note that the divergence may not occur all the time, but its worthy of note.

1 Locate the last two lows then connect them with a line.

2 Trace the lows to the RSI and then connect them with a line.

3 The line drawn connecting the RSI lows should and must rise diagonally or be horizontal. The candlestick line drawn could be diagonally up or down or be horizontal (double bottom).

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