Trading Strategies Revealed – “RSI Divergence” review

Trend reversal trading strategy “RSI Divergence” is designed mainly for Forex and can be used on all currency pairs on any time frames

What is the Divegence

A Regular Divergence is when a price moves in one direction and, typically an RSI indicator, moves in opposite direction. Basically, if you see the price going up and making new higher highs, but the RSI is making new lower lows, you have a divergence. Hidden divergences only mean that there is a divergence within a trend. While a trade with divergences that are regular indicates a reversal of trending price action, hidden divergence is an indication that the trend will continue.

How to trade RSI Divergence

A treade should place the buy order when he sees the RSI divergence

Initial back-test

To run a back-test we have coded a complete RSI Divergence trading strategy as a MetaTrader 4 Expert Advisor. During preliminary analysis we have identified that the best time frame for RSI Divergence trading strategy is 1 hour (H1). We have run a back-test of RSI Divergence trading strategy. For our test as a trade exit rule we have used a Trailing Stop of 30 pips which is launched after a trade has started and is modified each new 1 pip of profit. From our point of view, such approach allows to maximize profit and minimize drawdown.

We have run the test for 2009.01.01-2020.06.01 using Every Tick modelling on EURUSD-H1, using 1:3 leverage, without reinvestment, assuming spread equals 10 ticks. These are the main parameters of RSI Divergence trading strategy performance at its non-optimized state:

ROI# of tradesWinning ratioMax. drawdown
-8.89%189835.62%93.47%

Trading data analysis

After running the initial test of a simple non-filtered strategy we perform a trading data analysis that allows to identify possible filters to use to make the strategy more profitable reducing the drawdown simultaneously.

The following charts may give some possible insights on which filters to apply (time sessions, day of week limitation, trend strength threshold, overbought/oversold conditions, volatility range) to turn this strategy profitable should you decide to use this strategy in your investment portfolio:


Optimization

RSI Divegence can be used with other indicators to filter out losing trades and make entry signals more accurate. After analysing trading data we have found the following insights which have helped us to increase the profitability of RSI Divegence trading strategy reducing it’s drawdown in 20 times:

  • Most of buy trades that were opened at too low value of Stochastic and most of sell trades that were opened at too high value of Stochastic were losing when trading “RSI Divergence” trading strategy during 2009 – 2020. It is risky to take trades in overbought and oversold zones.
    (ROI increase -88% -> -2%, Drawdown reduction 93% ->27%)
  • Most of trades that were opened at boundary stare of RVI were losing when trading “RSI Divergence” trading strategy during 2009 – 2020. It is preferred to take trades at more stable market.
    (ROI increase -88% -> 55%, Drawdown reduction 93% ->11%)
  • Most of trades that were opened too close to upper and lower lines of Bollinger bands where losing when trading “RSI Divergence” during 2009 – 2020. Market behavior in these areas is unpredictable.
    (ROI increase -88% -> 34%, Drawdown reduction 93% ->10.35%)

Optimization results

We have analysed data received from a test of RSI Divergence trading strategy during 2009 — 2020 years and applied some filters such as RVI and Bollinger Bands. As a result, the profitability of the strategy has increased from -88.92% up to 40.91% and it’s drawdown has reduced from 93.47% to 5.04% using leverage 1:3.

Post-optimization back-test

Reducing the drawdown has allowed us to increase the leverage that can be used while trading this strategy up to 1:25, which in turn, has resulted in annualized ROI increase up to 34.09%!

Reducing the drawdown has also allowed us to use risk based lot calculation. Below you can see the back-test results using $10,000 initial balance and 7% risk per trade:

ROI# of tradesWinning ratioMax. drawdown
86.10%15846.84%40.98%

Analyze your trading strategy!

If you have a trading strategy that you want to analyse, optimize and increase its profitability (or even turn it from losing into a profitable Forex trading strategy) – feel free to contact us! Our trading data analysis team will respond to you within 24 hours clarifying all the details needed.

Our company specializes on automated trading systems and trading indicators development for the most popular trading platforms, such as MetaTrader 4/5, NinjaTrader 7/8 and cTrader.

If you need your own automated trading software designed based on your individual requirements, make a request for a free consultation with our team of professional programmers and find out the cost and terms of your project development.

More detailed info about our services for particular trading platform you can get at the following pages of our web-site:

MetaTrader 4/5 https://nordman-algorithms.com/metatrader-programming
NinjaTrader https://nordman-algorithms.com/ninjatrader-programming
cTrader https://nordman-algorithms.com/ctrader-programming

Disclaimer: Hypothetical or Simulated performance results have certain limitations, unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity.

Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown.

Past performance is not necessarily indicative of future results. The customer is responsible for using the product at his or her own risk and “Nordman Algorithms” is not responsible for any possible losses caused by use of the product, including but not limited to losses.