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We'll be back shortly. Thursday, January 26, Trading Setup Tutorials: Welles Wilder is a giant in the field of technical analysis. Now, these indicators are among the most popular. The default RSI setting of 14 periods works well for swing traders. But many intraday traders find it lacking because it produces infrequent trading signals. Some traders deal with this problem by lowering their time-frame. Others lower the RSI period setting to get a more sensitive oscillator.
However, these solutions produce RSI signals that are more unreliable. Getting infrequent trades is not always a problem for intraday trading. That is if the few trading setups that show up are high-quality ones.
Our aim is to find intraday reversal setups with a high reward-to-risk ratio. Price is testing a support zone. Buy above any bullish price bar. Price is testing a resistance zone. Sell below any bearish price bar. Areas of congestion are useful for finding support and resistance zones. In the examples, we have marked the Congestion Zones using shaded areas.
Trading sessions are separated by the black vertical lines. The congestion zone from the previous session projected a potential support zone. The RSI fell below 30, prompting us to look for potential trades. We went long a tick above it and caught the low of the trading session.
The 5-minute time-frame is another common choice among intraday traders. This congestion area from two sessions ago acted as resistance in the last session. You can manage you subscriptions by following the link in the footer of each email you will receive.
Intraday forex market seasonality points to significantly different market conditions depending on trading session and time of day. How can we shift trading techniques to take advantage of such moves?
The Relative Strength Index is one that has featured prominently in past DailyFX Strategy reports, as its popularity and reasonably good track record makes it a good benchmark range trading strategy. In particular we noted that the RSI tends to do poorly during times of high market volatility. Thus it seems reasonable we may look to explore intraday trends in volatility and attempt to use similar filters to avoid poor conditions for the RSI trading strategies.
Given that the forex market is open 24 hours a day, it is important to note key differences in three distinct trading sessions and use this information to our advantage. As the charts show, volatility is most often highest through the overlap between the London trading session approximately If we know that a strategy is likely to underperform amidst the sharpest currency moves, then we should probably avoid trading through such times.
It seems worthwhile to explore the concept of a time filter for the RSI strategy. When we discussed volatility filters for the RSI, we found that the strategy tended to underperform during the most active market conditions. Thus we will look to use the same concept on an intraday level and with the simplest rules possible from the start. Though it shows some periods of strong results, fairly frequent sharp declines mean that the equity curve slopes sharply downward.
Our aim is subsequently to mitigate those pronounced losses and hopefully turn things around. Looking for periods of low volatility for RSI Strategy. Namely, in the final hour of the New York session It is likewise clear that the strongest volatility tends to occur through late London and early New York trading hours—potentially warning against trading any strategies especially vulnerable to sharp currency moves.
When the period RSI crosses above 30, buy at market on the open of the next bar. When RSI crosses below 70, sell at market on the open of the next bar. Strategy cannot enter trades between the start hour startTime and end hour endTime. Yet it will not close any open trades at end hour and will hold them open until the reverse signal is triggered.
More on that topic later. Strategy will exit a trade and flip direction when the opposite signal is triggered. In order to test the validity of this filter, we of course need to establish which times we would like to start trading and stop trading altogether. Below is the resulting equity curve.
Certainly this is an improvement over the base case of steady losses. Yet the fact that the equity curve has done little other than decline in the past 2 or so years does not bode well for future prospects, and indeed we may need to explore further options as far as our start and end times are concerned. Thus we turn to optimization.
Using Strategy Trader we will optimize against two variables in order to maximize theoretical profits. When we optimize we always want to find the best hypothetical risk-adjusted returns.
And though we will keep the limitations of hypothetical trading strongly in mind, looking at what has worked in the past gives us a better sense of what is more likely to work in the future. Minimum account size is determined by the maximum theoretical drawdown of the particular strategy. It is admittedly difficult to properly display a 3D chart on a 2D medium, but the optimization results chart is quite revealing. What is our absolute best hypothetical backtest result? We are always in search of the most robust and stable result that is likely to work well in the future.
One of the ways I have personally checked optimization results is to make sure they are consistent across currency pairs. At this point it serves to mention that all currency pairs are not created alike, and this is especially true given that traders across the world will tend to trade more heavily in their regional currencies.
It subsequently makes sense to compare currencies of the same region against each other when running robustness checks.