Relative Strength Index (RSI) Mean Reversion is a trading strategy that uses the RSI indicator to identify overbought and oversold conditions in the market. The strategy is based on the idea that prices tend to revert to their mean over time, and that by identifying when the RSI is in an overbought or oversold condition, traders can enter positions in the opposite direction with the expectation that the price will revert to its mean.
To use this strategy on the M5 timeframe, traders would first need to set up their chart with the RSI indicator. A common setting for the RSI is 14 periods, but traders can experiment with different settings to see what works best for them.
Buy trade entry rule:
- RSI is below 30
- Wait for the RSI to cross above 30
- Enter a long position
Sell trade entry rule:
- RSI is above 70
- Wait for the RSI to cross below 70
- Enter a short position
- Exit the trade when the RSI reaches 70 (for long positions) or 30 (for short positions)
- Exit the trade when price reaches the stop loss level
Regarding Lot sizing strategy, It is important to use proper risk management when using this strategy. Traders should calculate the proper position size for each trade based on their account size and risk tolerance. A common method of calculating position size is to use a fixed percentage of the account. Traders can also use a fixed dollar amount or a fixed number of units, such as shares or contracts.
It’s always recommended to start with a small amount of money and increase it gradually as you gain more experience and confidence in your trading strategy.
To use this strategy on the H4 timeframe with the RSI set at 2 periods and levels used at 10 and 90, the following rules can be applied:
- Buy Trade Entry: When the RSI is below 10, enter a long position.
- Sell Trade Entry: When the RSI is above 90, enter a short position.
- Exit Rules: Exit the trade when the RSI moves back to the opposite level (10 or 90) or when a stop loss is hit.
In terms of lot sizing strategy, it’s best to use a fixed fractional position sizing strategy. This means that you will always risk a fixed percentage of your account balance on each trade. For example, if you decide to risk 1% of your account balance per trade, you would divide your account balance by 100 and use that number to determine the number of lots to trade. This can help to ensure that you are not over-leveraging your account and can withstand any drawdown that may occur.
It’s important to keep in mind that trading strategies based on indicators alone are not guaranteed to be profitable and it’s important to use proper risk management strategies and backtest your strategy before committing to live trades.