RSI Divergence Reversal Strategy

Overview

This strategy is a reversal strategy based on the RSI indicator. It calculates two RSI lines with different lookback periods and enters long or short trades when the two RSI lines cross over.

Strategy Logic

1. Calculate two RSI lines, one with shorter period and one with longer period.

2. When the shorter period RSI crosses above the longer period RSI, determine a bullish signal for going long.

3. When the shorter period RSI crosses below the longer period RSI, determine a bearish signal for going short.

4. When going long, set stop loss at the latest price.

5. When going short, set stop loss at the latest price.

6. If price hits stop loss, exit the current position.

Advantages

1. Using RSI to identify potential reversal points is reasonably reliable.

2. Dual RSI crossover filters out some false signals.

3. Stop loss controls risk for each position.

4. Simple and intuitive logic, easy to implement.

5. Customizable RSI parameters suit different markets.

Risks

1. RSI lag may miss reversal timing of sudden trend changes.

2. Improper stop loss setting may cause unnecessary losses.

3. Dual RSI cannot fully avoid false breakout risks.

• Risk 1 can be mitigated by combining indicators like Bollinger Bands.

• Risk 2 can be improved via trailing or pending order stops.

• Risk 3 can be reduced by adding trend filters.

Enhancement Opportunities

1. Test effectiveness of different RSI period combinations.

2. Evaluate combining with indicators like MACD, KD etc.

3. Add stop loss techniques like trailing stops or pending orders.

4. Add trend filter to avoid trading reversals.

5. Assess performance across different products and timeframes.

Conclusion

This strategy executes simple reversal trades using RSI divergences. Dual RSI and stops control risks. Further improvements can be made through combining indicators, optimizing stops and more.