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RSI Trend-line Break Strategy







This series of articles will present several strategies for all types of trading. Breakout, trend, swing and ranges. All of the strategies will have some common characteristics that are essential in order to be profitable. These are,
v  Few and simple rules that are easy to follow and that will permit emotion-free trading
v  Strict  money management. They all rely on a minimum 2:1 risk-reward ratio
v  Clean charts that are not overloaded with indicators
v  All strategies have losing trades. But if a trader follows some basic rules then there is no doubt that he is going to be successful.
RSI is one of the most popular indicators, but most new traders are familiar only with the traditional overbought and oversold signals of the indicator. Actually RSI can be used in many different ways that are quite more effective. The traditional 70-30 level trading is profitable only for range trading and it will generate  huge losses in other market conditions, especially in short-term trading. The article will present a not so known way to use the indicator.  The strategy is based on trend lines plotted on a 14 period RSI. The trend lines are plotted just like a on price chart. The trader connects a starting point to one or more lower highs ( down line) or higher lows (up line). When there is a break then there is a trade. This is a swing trading strategy that does not take account the overall trend, just the direction of the break and it is very effective in both short and long term trading.
Intraday to short term trading.
For this style of trading the most suitable timeframe is the 15 minutes. Let’s see how a trader can use the strategy.
v  Entry rule: 15 minute trend line break
v  Size: 1 mini or standard lot
v  Risk: 2:1 risk-reward ratio

The chart shows 3 down brakes of GBP-USD.
RSI 2

BREAK A.
The highlighted areas show a clear down break at point A. The trader sells 1 lot with a 30 pip stop just above the closest swing high. He sets the limit at 45 pips in order to have the minimum 1:1 RR ratio. Higher ratios are not recommended for short term trading. The limit is hit a few hours later.
BREAK B.
At point B we have another down break. The previous swing high is at 25 pips, so our stop is set there. Based again on the 1.5:1 RR rule, we set the limit at 37 pips. The trade is successful.
BREAK C.
A few candles later there is another down break at point C. The stop is set at 13 pips again just above the previous high. The limit now is 20 pips. The target is hit very fast.

The strategy is suitable for short term traders since it offers signals every day and it has very low drawdown , a fact that allows a small account. A trader can start trading with low capital. The only precaution is to avoid trading the first hour after news events like NFP, GDP, FED decisions etc. Extreme volatility can lead to false breaks.

Medium-Term Trading.
For this style of trading the most suitable timeframe is the 4 hour. Positions can remain open for a few days. Let’s see how a trader can use the strategy.
v  Entry rule: 4 hour line break
v  Size: 2 mini or standard lots
v  Risk: 2:1 risk-reward ratio

The chart shows 2 brakes of GBP-USD.
RSI 1



BREAK A.
There is clean down break at point A. This time the trader sells 2 lots with a 70 pip stop a few pips above the previous high, which happens to be at the same candle. He sets the limit for the first lot at 115 pips (1.5 RR ) and at 140 pips for the second (2:1 RR). The next day price reached the first target and the first lot is closed. At this point the trader moves the stop for the second lot at break-even in order to have a risk-free trade. This is the most important part of the strategy. If the pair reverses, then the trader has no loss for the second lot, but it has the profit from the first. This time the pair continued to fall and the second lot reached the target. As anyone can see, the chart shows a strong uptrend. A trend or breakout trader would never have made this trade. But this a swing trading strategy that does not take into account the overall trend.
BREAK B.
We have an upside break at point B. We buy 2 lots with a stop set below the previous low at 85 pips. According to the rules we set two limits at 130 and 170 pips. Again after we reach the first target we move the stop of the second lot to breakeven. The second target was hit a few candles later and we close the position.

This strategy can be back tested manually very easily. I strongly recommend all traders to do that in order to verify the profitability of the strategy. Besides the  above examples, this strategy can be successful in all timeframes. From the daily to an 1 minute chart for scalping. It all depends on the style of your trading and your goals. In any case just keep it simple and follow the rules.
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