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RSI Mean Reversion Forex Scalping Strategy

Jul 29, 2019
RSI Mean Reversion Forex Scalping Strategy

You can now download the RSI Mean Reversion Forex Scalping Strategy for free on AtoZ Markets indicators gallery.

The Relative Strength Index (RSI) is one of the more widely used oscillating indicators. It is a bounded oscillator, which means it oscillates within a fixed range, from 0 – 100. This particular feature allows traders to identify extremes or overextended market conditions. Although the RSI rarely reaches 0 or 100, there will be instances when the RSI goes to extremes, depending on the parameters used. These extremes are prime areas for market reversals.

This strategy is a mean reversion strategy based on the RSI. The idea is to enter the market whenever the RSI is on an overextended condition and price action is also showing signs of price rejection or reversal.

So, how do we determine if the RSI is on an overextended condition? The usual parameters used is on the 30 and 70 levels. Traders would often consider price to be oversold if the RSI is below 30 and overbought if it is above 70. However, for this strategy, we will take things a little further, to improve our odds. We will be using the 20-80 level. Price would be considered oversold if the RSI is below 20 and overbought if above 80. This would filter out lower probability conditions.

Now that we have determined how we will enter the market, the next question is where do we expect the price to go. Mean reversion basically means that price would revert to its average. Given this definition, we will be using the most basic averaging indicator, a moving average. In particular, we will be using the 20-period Exponential Moving Average (EMA). This an average which price would usually revert to when retracing, and it still allows for a reasonable reward-risk ratio. As soon as the price reaches the 20 EMA, we then close our trade, or we could constantly move our take profit target as the 20 EMA moves.

Indicators:

  • RSI
  • 20 EMA

Currency Pair: EUR/USD, GBP/USD

Timeframe: 5-minute chart

Trading Session: London and New York Session

How to trade with RSI Mean Reversion Forex Scalping Strategy? 

Buy (Long) Trade Setup Rules

Entry

  • The RSI should be below 20
  • The RSI is curling back up
  • Candles should be having wicks at the bottom
  • Enter a buy market order when the above rules are met

Stop Loss

  • Set the stop loss below the entry candle

Take Profit or Exit

  • Option 1: Close the trade when price hits the 20 EMA
  • Option 2: Constantly move the take profit to where the 20 EMA is until it is hit

Sell (Short) Trade Setup Rules

Entry

  • The RSI should be below 80
  • The RSI is curling back down
  • Candles should be having wicks above
  • Enter a sell market order when the above rules are met

Stop Loss

  • Set the stop loss above the entry candle

Take Profit or Exit

  • Option 1: Close the trade when price hits the 20 EMA
  • Option 2: Constantly move the take profit to where the 20 EMA is until it is hit

How to download and install an indicator?

In order to install the indicator on your MT4 platform, you need to follow these steps:

  1. Click on “Download Indicator” button located at the top right corner of the screen.
  2. Save the file to your computer.
  3. Extract and move the files into MT4>Indicator folder of the MetaTrader4 software file directory.
  4. Restart your Metatrader platform.
  5. Navigate to “Indicators.”
  6. And select “RSI Mean Reversion Forex Scalping Strategy” template to apply it on the chart.

 

Note: This indicator was developed by T. Morris. AtoZ Markets does not carry any copyrights over this trading tool.

Disclaimer: The views and opinions expressed in this article are solely those of the author and do not reflect the official policy or position of AtoZ Markets.com, nor should they be attributed to AtoZMarkets.