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

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%

NORDMAN ALGORITHMS

TRADING SOFTWARE DEVELOPMENT

With financial background, using excellent programming techniques, developing automated trading systems of a splendid quality that serve your investing purpose.

CONTACT INFO

Mon - Fri : 08:00 - 18:00 EEST

[email protected]

11412, Majaka str. 26, HarjuCounty, Tallinn, Estonia

RISK DISCLOSURE

Trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.

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.

Please note, that testimonials appearing on this website may not be representative of other clients or customers and is not a guarantee of future performance or success.