Strength trading with Chande momentum and RSI

System Overview

Markets Traded – ALSICharts – Ideal CFD – 10 min chartCharting Software - Ideal CFDIndicators – 9 Period RSI and the 13 period Chande Momentum OscillatorLot Size – 1 at a time but you may end up holding up to 3 at a given time

Description

This is a simple system that looks for overbought and oversold conditions to enter the market so it works best in non trending markets but will still deliver a nice constant, positive equity curve.

The Relative strength Index

The Relative Strength Index or RSI has become an extremely useful and popular momentum oscillator. It compares the magnitude of a market's recent gains to the magnitude of its recent losses and turns that information into a number that ranges from 0 to 100. A reading of 70 or higher is considered overbought with an increasing chance of a reversal to the downside, while a reading of 30 or below is considered oversold with an increasing chance of a reversal to the upside.

Chande Momentum oscillator

This is a technical momentum indicator invented by the technical analyst Tushar Chande. It calculates the difference between the sum of all recent gains and the sum of all recent losses and then divides the result by the sum of all price movement over the period. It is similar to other momentum indicators such as the Relative Strength Index and the Stochastic Oscillator as it is range bounded (+100 and -100).

The stock is deemed to be overbought when the momentum oscillator is above +50 and oversold when it is below -50. Many technical traders add a nine-period moving average to this oscillator to act as a signal line and I have used a 13 Period moving average. Bullish signals are generated when the oscillator crosses above the signal, and bearish signals are generated when the oscillator crosses below the signal.

Chart Setup.

1. Load a 15 min chart or 30 min.
2. Bring up the RSI settings 9
3. Load the Chande Momentum Oscillator 13 period close

System Rules

For long trades

1. RSI above 30 level.
2. Chande momentum oscillator e below -50 level.
3. Buy 1 lot
4. Stop loss must be fixed, in the examples I used 200 points
5. Risk reward must be set to 1.5 or higher, I used 350 points profit stop/target limit in the examples.
6. When in a short and a signal for a long appears you must not close the short but still take the long while holding the short. Only let your stop loss or stop profit take you out. The reason is that you can not predict what will happen next and so you must rely on the risk reward ratio to make you money in the end. When there is very bad or good news out you may make an exception and close out.

For short trades

1. RSI must be below 70
2. Chande Momentum Oscillator must be above 50
3. Sell 1 lot
4. Stop loss must be fixed, in the examples I used 200 points
5. Risk reward must be set to 1.5 or higher, I used 350 points profit stop in the examples.
6. When in a short and a signal for a long appears you must not close the short but still take the long while holding the short. Only let your stop loss or stop profit take you out. The reason is that you can not predict what will happen next and so you must rely on the risk reward ratio to make you money in the end. When there is very bad or good news out you may make an exception and close out.

Short and Long Trade Examples

As can be seen from above I have shown the long and short trades together because it is a sort of swing system and goes on continuously.

It is important to note that even when you are in a long trade you should open a short trade if the system so requires.

Buy 1 contract when the RSI is below 30 and the Chande is below -50 at the same time and keep it until the stop loss or stop profit is taken.

Sell one if the RSI is above 70 and the Chande is above 50 at the same time and keep until profit stop or stop loss is taken.

Enter 1 contract short when RSI is above 70 and Chande is above 50.

Stop loss is -200 from entry and profit target is 350 above entry.

Take profit at target.

Sell one contract short when RSI is above 70 and Chande is above 50.

Stop loss is set at 200 points above entry and profit target of 350 points below entry.

Profit target has been reached in this example.

Sell one contract short when RSI is above 70 and Chande is above 50.

Stop loss is set at 200 points above entry and profit target of 350 points below entry.

Profit target has been reached in this example.

Buy 1 contract when RSI is below 30 and Chande is below -50.

Hold for profit target of 350 above entry with a stop loss of 200 below entry.

Profit target is hit.

Enter 1 contract as RSI is below 30 and Chande is below -50.

Stop loss of 200 below entry and a profit target of 350 points above entry.

Profit target has been reached.

Enter with 1 contract when RSI is below 30 and Chande is below -50.

Set stop loss at 200 points below entry and profit target at 350 above entry.

The profit target is reached and position closed.