Trend Trading with Fibonacci & RSI based on the ABC algorithm
The basis of the trading strategy Trend Trading with Fibonacci &. The RSI is based on the principle of detecting C wave, which, according to the classical wave analysis, is the longest in the three-wave structure ABC. You can discuss the strategy on forexfactory.com at on this topic.
Determining the beginning and end of the first impulse wave
First we need to determine the beginning and the end of the first (impulse) wave A. To do this we will help RSI oscillator(14). If the oscillator broke through the level of 70, it means that the upward trend started together with a new impulse wave. If the oscillator broke through the level of 30, the situation is opposite. A downward trend has begun.
An additional criterion for the end of the A wave can be divergence.
After the formation of the first impulse wave, there is a price pullback and along with it the oscillator pullback. If the RSI reached the level of 40 (after the breakdown of the level of 70) and turned upwards, presumably, a correction is formed, and wave C upwards is being prepared.
If the RSI reaches the 60 level (after the breakdown of the 30 level) and turns down, presumably a correction has been formed and the downward wave C is being prepared.
Additional criteria for the end of correction:
- The price reaches and consolidates near a significant Fibonacci level, which is applied after the momentum is formed.
- The price rests on one of the moving averages (see figure below).
- A reversal pattern of candles was formed.
Determining a market entry point
After the correction is over, we open a trade in the direction of the expected wave C. We put the stop just above / below the neighboring Fibonacci levels.
Calculating Take Profit Level
Take Profit is also calculated using Fibonacci levels:
- If the price rebounded from the level of 38.2%, the take profit is set at 138.2%.
- If price rebounds from 50% or 61.8%, take profit is set at 161.8%.
- If the price rebounded from the 78.6 level, take profit is set at the level of the top of the impulse wave A or the 118.1% level.
In addition to Fibonacci levels, it is possible to close near moving averages or significant support/resistance levels.
As additional filters increasing the probability of a profitable trade, you can use the position of the price relative to the slow moving average SMA (200). If the price is above the SMA (200), we open only upwards, otherwise - downwards.
It will not be superfluous to assess the situation on higher timeframes.
Recommendations for risk management
The experts at fortrader.org recommend opening trades with a risk/profit ratio of at least 1:2. After calculating the stop-loss, choose such a lot volume that the risk was no more than 2-5% of the deposit per trade. Such a ratio will allow you to sustain a long series of losing trades. Your deposit will be satisfied :-).
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