After ten years in the crypto space and seven years of professional trading, I, a 90s kid, have reached a place where I can do as I please. From the initial fifty thousand to today’s thirty-five million, this transformation stems from the iron rules and practical essence that I steadfastly adhered to.
Four years ago today became a turning point in my life! It allowed me to regain everything I had lost!
I reviewed all my trade records, reading them carefully, and my heart was filled with mixed emotions. Those over a thousand trades felt like a tumultuous historical account. Among them, 70% of the loss records felt like heavy shackles, making it hard for me to breathe. Meanwhile, the mere 30% of profits seemed so insignificant. What pained me even more were the over two hundred records of significant losses, which cut through my heart like a sharp blade.
Reflecting on these trade records, I found the root of the problem—greed. Those significant loss trades often stemmed from my avarice. When opportunities arose, I hesitated to let go; when losses came, I was unwilling to stop loss. It was these hesitations and greed that repeatedly led me into the abyss.
Those small losing trades often stemmed from my confusion and blind following. In situations where my thoughts were unclear and my grasp was weak, I entered trades blindly, hoping for luck. However, luck does not always favor me. Over time, these small losses accumulated into significant losses. Ultimately, it was my lack of clarity and determination regarding entry points. The true entry point should be the start of a price increase, rather than blindly entering during range fluctuations when conditions are unclear.
After countless failures and reflections, I finally found my own methods and techniques. I meticulously studied and summarized these insights and practical essentials, forming my unique trading system. Today, this system has become my effective assistant in the crypto space.
Today, I am willing to share these valuable experiences with every follower. I hope you can draw strength from them and avoid unnecessary detours. If you find these shares helpful, please don't forget to like and save them!
Having been through the rain, I understand better how to hold an umbrella for others. This is my heartfelt message and my sincere wish for all of you.
After reading this article, you will discover a powerful trading method that combines the 20-period simple moving average (SMA) and the Relative Strength Index (RSI) indicator. This strategy provides clearer entry signals and helps confirm market momentum before you commit capital. By combining these two complementary tools, you will filter out market noise and focus on high-probability trading opportunities. The advantage of this strategy is its versatility across different time frames and currency pairs—but there's a specific way to coordinate these indicators for maximum effect.
20 SMA and RSI Forex Trading Strategy
When looking for a reliable and uncomplicated forex trading strategy, the combination of 20 SMA and RSI is an excellent choice.
This approach combines two powerful indicators that perfectly complement each other.
The strategy identifies trends using the 20-period simple moving average while using RSI to confirm momentum.
The 20 SMA is used to identify trend direction, while the RSI verifies potential momentum, allowing for more accurate trading decisions.
You will find that SMA crossover signals are particularly helpful in determining entry points, while RSI divergence analysis helps predict potential reversals.
The uniqueness of this approach lies in its simplicity.
You don't need advanced technical skills, just follow clear trading rules.
To improve performance, consider using support/resistance flips as additional confirmation points to plan your entry.
Understanding the core components of the 20 SMA strategy
The core components of the 20 SMA and RSI strategy are built on the principles we've just discussed.
When applying this method, you'll find that various SMA variants can improve your trading decisions. Some traders prefer using a 15 SMA for faster signals, while others may choose longer periods for smoother trends. The 15-minute chart provides an ideal balance for day traders, allowing for quick market insights while maintaining sufficient data for reliable analysis.
Adjusting the RSI is equally important—changing the recommended 5-period setting to 7 or 14 periods can significantly affect its sensitivity.
Remember, these components work together as a system rather than individually. The key is to find a combination that matches your trading style and time frame while maintaining the strategy's core advantage in trend identification.
Set up charts for maximum effect
Setting up the chart correctly is critical to the success of the 20 SMA and RSI strategy.
First, select your preferred time frame. The strategy can be applied to any time frame, but 4-hour or daily charts typically produce more reliable signals.
In the chart layout, add the 20-period simple moving average and set the RSI indicator to 5 periods.
These specific indicator adjustments are uncompromising for the correct operation of the strategy. Ensure that the RSI has a visible 50 level, as this is an important threshold for your trade confirmation.
The 20-period SMA will help identify medium-term trends while filtering out unnecessary market noise.
The psychology behind price action and moving averages
Understanding why the market reacts to moving averages reveals deeper psychological forces driving forex trading.
Moving averages are not just for tracking prices—they reveal the collective psychology that shapes market behavior.
When the price approaches the 20 SMA, traders make collective decisions based on their expectations of support or resistance.
This market psychology is reflected in price action—the visible footprints of all buying and selling decisions.
You will notice that prices often bounce off the 20 SMA like magic.
However, this is not magic; it is the collective effect of thousands of traders seeing the same signals and taking similar actions. Looking left, you might see the support/resistance structures that the price is reacting to.
Experienced traders often complement this analysis with moving average crossover strategies to confirm potential entry and exit points in trending markets.
Optimize RSI settings for the best signals
While many traders use the default RSI settings, customizing the RSI parameter to 5 periods (instead of the standard 14 periods) can significantly improve the responsiveness of signals in this strategy.
This shorter period makes the RSI more sensitive to recent price changes, helping you capture trends earlier.
For ideal RSI settings, always use 50 as the centerline threshold.
When the price reaches a new high but the RSI does not, pay attention to RSI divergence analysis—this often signals a reversal.
When fine-tuning settings, remember that more sensitive indicators require more attention to filter out false signals.
Combining the 5-period RSI with the 5 SMA strategy can provide higher precision entry points for short-term trades.
Entry rules under bullish trend conditions
Knowing when to enter during bullish trend conditions can enhance your profit potential. Every strategy requires an appropriate entry strategy.
First, you need to confirm two key entry indicators: the price must be above the 20 SMA, and the RSI should bottom out below 50 and begin to reverse upward.
Wait for the price to pull back to the 20 SMA, at which point the 20 SMA acts as dynamic support. Key point - look left to find some price structure support (such as trading range, swing lows).
Once you see a confirming candlestick pattern forming, set your buy stop-loss order above its high.
This systematic approach ensures that you enter during trend momentum while leveraging market conditions to your advantage.
Entry rules under bearish trend conditions
To profit under bearish conditions, you need to follow specific entry rules to capitalize on downside momentum.
First, confirm that the price is below the 20 SMA, indicating a downtrend. Watch for the price to bounce from below and test the 20 SMA.
Watch for bearish divergence signals on the RSI, where the RSI should peak above 50 and start to reverse downward. This market trend analysis helps identify suitable entry points.
Set your sell stop-loss order below the low of the confirming candlestick, with the stop loss set above its high.
To further validate, look for reversal candlestick patterns at resistance levels to enhance your bearish entry signal.
Stop-loss setting techniques for minimizing risk
In forex trading, setting the correct stop loss is the foundation of effective risk management.
When using the 20 SMA and RSI strategy, always set the stop-loss for sell positions above the high of the entry candlestick, or set the stop-loss for buy positions below the low of the entry candlestick. This can protect you from sudden market reversals.
Combine stop loss with position size management to ensure that the risk you take on any single trade does not exceed 1%-2% of your account.
This dual approach minimizes your risk exposure while leaving enough room for profitable trades to develop into winning positions.
Consider using the Average True Range (ATR) indicator to dynamically adjust stop-loss distances based on current market volatility.
Take profit strategy for maximizing profits
When trading the 20 SMA and RSI strategy, you need to implement effective take-profit techniques that align with market conditions. Setting take-profit at three times the risk amount can create a favorable risk-reward ratio, maximizing gains while maintaining discipline. I would like to add that I am perfectly fine with a risk-reward ratio of 1:1.25, as these smaller gains tend to be more stable.
Additionally, you can exit when contrary signals arise. In strong trends, consider using trailing stops to lock in profits as the market moves in your favor. Understanding the market context is crucial in determining the most suitable exit strategy, similar to island reversal patterns.
Trading Plan: 20 SMA and RSI Forex Trading Strategy
Entry rules for long trades (buying)
1. Trend confirmation: Ensure the price is above the 20 SMA, indicating an uptrend.
2. RSI signals: Confirm that the RSI has bottomed out below 50 and is beginning to reverse upward.
3. Pull back to 20 SMA: Wait for the price to pull back to the 20 SMA, at which point the 20 SMA acts as dynamic support.
4. Confirm candlestick patterns: Look for bullish candlestick patterns that form near the 20 SMA (such as engulfing patterns or pin bars).
5. Entry execution: Set the buy stop-loss order above the high of the confirming candlestick.
Entry rules for short trades (selling)
1. Trend confirmation: Ensure the price is below the 20 SMA, indicating a downtrend.
2. RSI signals: Confirm that the RSI has peaked above 50 and is beginning to reverse downward.
3. Pull back to 20 SMA: Wait for the price to bounce back to the 20 SMA, at which point the 20 SMA acts as dynamic resistance.
4. Confirm candlestick patterns: Look for bearish candlestick patterns that form near the 20 SMA (such as engulfing patterns or pin bars).
5. Entry execution: Set the sell stop-loss order below the low of the confirming candlestick.
Stop loss settings
● Long trades: Set the stop loss below the low of the confirming candlestick.
● Short trades: Set the stop-loss above the high of the confirming candlestick.
Take profit strategy
● Set at least a 1:3 risk-reward ratio (for example, if the risk is 20 pips, the target profit should be 60 pips).
● Alternatively, use trailing stops to lock in profits as trades move in your favor.
● If the RSI shows divergence from the price trend, exit the trade, as this indicates a potential reversal.
Additional notes
● The strategy performs best on 4-hour and daily charts.
● Avoid trading during major news events to reduce the risk of false signals.
● Use candlestick patterns (such as pin bars or engulfing patterns) as additional confirmation for entry signals.
By adhering to these precise entry and execution rules, you can confidently implement the 20 SMA and RSI strategy in your trading plan.
Adjust the strategy across different time frames
The flexibility of the 20 SMA and RSI strategy is not limited to take-profit methods but can be applied across various time frames.
The adaptability of this strategy means you can engage in quick day trades on a 15-minute chart or hold long positions on a daily chart.
When adjusting time frames, remember that higher time frames usually produce more reliable signals but fewer trading opportunities.
Lower time frames offer more frequent setups but may produce more false signals.
Try starting with the 4-hour chart to balance reliability and frequency while building confidence in the strategy.
When trading this strategy, be cautious of false breakouts, as the market often tests above key levels to trigger stop-loss orders before reversing.
Currency pairs best suited for this system
The four major currency pairs perform particularly well in the 20 SMA and RSI strategy: EUR/USD, GBP/USD, USD/JPY, and USD/CHF.
These currency pairs provide ideal trading conditions due to their liquidity and predictable trend behavior.
Major currency pairs offer the perfect combination of liquidity and predictable trends for effective technical analysis.
You will find that EUR/USD is particularly suitable for beginners, as it combines stable movements with manageable volatility.
GBP/USD performs well during the London trading session, while USD/JPY excels during the Asian trading session.
For best results, avoid trading exotic currency pairs that may produce unstable signals. These pairs are typically formed by pairing a major currency with a currency from an emerging economy. Examples include USD/RUB, USD/ZAR, etc.
Stick to major currency pairs as price action tends to align more reliably with the 20 SMA, creating clearer buying and selling opportunities.
These major currency pairs also allow for more effective stop-loss placement when trading support and resistance levels.
Filter trades during major news events
When trading the 20 SMA and RSI strategy, you should be cautious to avoid entering before or during major news events. News impacts can cause sudden and unpredictable price fluctuations, rendering technical analysis patterns ineffective.
Pause trading at least 30 minutes before major economic data releases (such as interest rate decisions, non-farm payroll reports, or GDP announcements).
Resume trading 30-60 minutes after the event, once volatility has calmed down. This precaution can prevent stop-loss triggers caused by news-related volatility rather than genuine trend changes.
Your strategy performs best under normal market conditions, where price movements follow more predictable patterns.
Identify and avoid false signals
Just as you filter trades during major news events, identifying false signals is another skill for successfully trading the 20 SMA and RSI strategy. A false breakout occurs when the price briefly breaks above the 20 SMA but quickly reverses, trapping careless traders who mistakenly believe the trend has changed.
To avoid these issues, always wait for signal confirmation before entering. Look for candlestick close prices (not just wicks) breaking the SMA.
Ensure the RSI trend aligns with price action—exercise caution if divergences occur.
Do not rush into trades. A few seconds of patience can prevent costly mistakes.
Use candlestick patterns to improve outcomes
Combining candlestick patterns with the 20 SMA and RSI strategy can significantly improve your trading results.
Candlestick pattern psychology reveals market emotions often overlooked by traditional indicators. Look for specific forms to confirm your entry signal as the price approaches the 20 SMA.
1. Doji patterns: A doji near the 20 SMA indicates market indecision and may signal a reversal point, providing you with earlier entry opportunities than using RSI alone.
2. Engulfing patterns: Indicate a strong momentum shift, confirming the importance of RSI signals.
3. Pin bar: When pointing against the trend direction and touching the 20 SMA, it forms a strong resistance bounce signal that should not be ignored.
Strategy assessment
Successful traders recognize that measuring performance is not just about tracking profits and losses. You need specific metrics to truly understand whether the 20 SMA and RSI strategy is effective.
First, assess your win rate, risk-reward ratio, and maximum drawdown. These metrics provide clearer insights than just the account balance.
To measure performance, keep a trade log recording your trades with entry reasons and market conditions.
Strategy optimization is not a one-time task. Regularly review your results, identify patterns in winning and losing trades, and make slight adjustments to improve outcomes.
Frequently Asked Questions
1. Can the 20 SMA strategy be used in conjunction with other oscillators (such as MACD, Stochastic, or CCI)?
Yes, you can use other oscillators (such as MACD, Stochastic, or CCI) in place of RSI in the 20 SMA strategy. These combinations of oscillators provide alternative confirmation signals while maintaining the trend direction functionality of the SMA.
2. How does the strategy perform during economic uncertainty or recession?
During economic uncertainty, you'll notice the strategy's effectiveness decreases as market volatility disrupts trends. Your strategy may perform poorly amid price fluctuations caused by economic indicators, requiring careful monitoring and adjustments to maintain profitability.
3. What is the recommended minimum account size for this strategy?
You should start with a minimum investment of $1,000 for proper risk management. With an ideal leverage of 1:100, you will maintain sufficient margin while effectively implementing this strategy.
4. Is this strategy suitable for automated trading systems?
Certainly suitable; you'll find that this strategy is very compatible with automated trading systems (EAs). Its clear entry, exit, and risk management rules can be effectively translated into trading algorithms for consistent automated analysis.
5. How often should I reassess the effectiveness of my SMA-RSI parameters?
You should conduct a backtest monthly and reassess after significant market changes. Reassess your SMA-RSI parameters quarterly, adjusting based on performance data to maintain the strategy’s effectiveness.
The crypto space is like a marathon; running fast is not as valuable as running steady. Those who earn money through luck often lose it back through skill. Only by embedding position management into my DNA can I survive in this merciless market. Remember: as long as you're alive, you have a chance to turn things around.
Even the most diligent fisherman does not go out to sea during stormy weather but carefully guards his boat, knowing that the storm will pass and sunny days will eventually come! Follow the trends, gain both fish and fishing techniques; the door to the crypto space is always open. Only by going with the flow can you achieve a life that flows with the trends. Save this and remember it!