Adding RSI to Moving Average Crossovers -- with David Moadel
hello and welcome to looking at the markets with David Modell today I'm
going to talk about a way to possibly hopefully filter out some of the
whipsaws in your moving average crossover strategy alright so what I've
got up here right now is Apple stock the 3-minutes candlestick chart each
candlestick represents three minutes of price action but everything I'm saying
today can be used with the one-minute candlestick chart or the 5-minute or the
one hour or even the one day daily candlestick chart you could use it for
intraday trading swing trading whatever because all these moving averages and
RSIs they'll adjust to whatever candlesticks you're using and as always
I always say this with these kinds of strategies make your own decisions do
your own due diligence test everything out with demo or virtual trading before
you even consider using real money make sure it works all right
test it out for a while with virtual trading demo trading don't use real
money and then only if it really works well for you then maybe try it with real
money okay and respect your stop losses and use small position sizes be safe at
all times please all right so that's the safety disclaimer right there so you can
use any two moving averages here a slow one and a fast one I am using the five
and the twelve which is one of my favorite moving average crossover
combinations that seems to work pretty well for me at least okay so but you
know you can use different numbers doesn't have to be five and twelve some
people like five and ten whatever as long as you have a fast one a fast
moving average and a slow one in this case the fast one is the five which is
dark blue here and the slower one is the twelve which is orange so the old
traditional method of moving average crossover strategies is when the faster
moving average clearly crosses above the slower one in this case the five going
above the 12 then you take a long position it
by in other words and then you don't sell until the faster moving average
crosses back below the slower one which seems to be happening right now with
Apple stock on the 3-minute candlestick chart alright so it's not quite
happening yet you want to wait until it clearly breaks below it or above it you
want to see a little bit of space between the two lines to make sure that
it clearly crossed like over here for example there's no clear crossing
they're just kind of on on top of each other that's not what you're looking for
there it is you see how there's a little bit of space between the two lines it
just crossed below it and so that would be a time to sell your stock maybe even
take a short position but some people just do long only you know just buying
and then selling you know they don't go short which is fine that's actually
safer not to go short just buy when it crosses above and then sell when it
crosses back below now this is pretty good during trending markets you know
when the price action is strongly going up or strongly going downwards if you're
shorting but during sideways choppy markets it's not so good all right and
let me try to find an example of sideways price action where it really
doesn't work too well let me see if I could find some choppiness here we go
yeah there we go yes it's it's pretty you see that when it's trending it's
pretty good right you got a nice you enjoy a nice run up okay but then when
it's sideways choppy whipsaws some people call it right when it's just kind
of up down up down up down up you know then you're you're buying then you're
selling soon afterwards you know buy sell buy sell buy sell and oftentimes
you're buying and then selling right afterwards and then you're eating up a
lot of commission costs sometimes oftentimes you buy a little bit higher
and that's you sell a little bit lower and so you're taking small losses over
and over so when it's sideways whipsaws whatever you want to call it choppy not
so good these moving average moving average crossover strategies you know
lose money during those situations oftentimes and so you're really counting
on though big run-ups to make money so how do you
filter out the whipsaws as they say well one possibility and again test this out
with demo trading virtual trading first make sure it works before you commit any
real money to it so one possible way is to also put on your chart and I'm using
trading Viacom by the way you can put up an RSI relative strength index indicator
but you're gonna have to change the settings for this particular method so
what I did was I changed the the default period for RSI is usually 14 period I
changed that to 5 so I've got the 5 period RSI and I also changed the
overbought and oversold settings usually 70 and 30 are the defaults for
overbought and oversold I changed them to 60 and 40 instead of 70 and 30 60 and
40 alright so you got to change a lot of the settings here so it's really tight
as you can see 60 and 40 for the overbought and oversold and so we're
gonna add an additional rule here before the rules were just when the fast line
goes above the slow line you buy and then when it crosses back below the slow
line you sell maybe you go short also so those were the rules before now we're
going to add additional rules the additional rule here is don't buy
anything unless the RSI line is above 60 all right and don't sell anything unless
the RSI line is below 40 all right so again you're buying only when it's the
RSI line is above 60 and you're only selling when it's below 40 and the idea
is that you're only working within trending markets alright so when the
line is between 40 and 60 when it's like you know 50 or 45 or 50 eight or
whatever you're not doing anything because that's not a trending market
that's a sideways market that's the idea here so when the RSI is above 60 or
below 40 then it's more of a trending market less of a sideways market and so
that's a rule you can add to your moving average crossover system to try to help
filter out the you know the whipsaws the choppy market the indecisive market you
want a more decisive more trending market and so you're adding these rules
and so let's say you get a you know crossover here right and so here the RSI
was at that moment above 60 a little bit at that time so you could have bought
then okay whereas if the this purple line here the RSI if it were in the
shaded area between 40 and 60 or below 40 even then you you wouldn't have
bought despite the crossover okay you would have waited until both those
conditions were true you would have waited until the RSI was indeed above 60
and the crossover was in effect and so you have to be a little bit more patient
all right and then you wouldn't have sold like for example right here when it
went below yeah but at that time let's see what happened at that time I I don't
remember you know but you would have looked down here looks like the looks
like it would have been in the shaded area I think I don't remember this was a
few minutes ago I wasn't watching carefully but if the if the line was if
the RSI line was below 40 when that cross under happened then you could have
sold but if it was in the shaded area you wouldn't have done it because then
you just got that choppy sideways action not a time to get out necessarily okay
but let's say the crossover was in effect and then the RSI Lian
soon afterwards went below 40 yeah then you could have sold then because both
conditions would have been true all right so I hope this is helpful this is
a way to filter out hopefully some of the sideways action which were kind of
getting right now in an apple all right and as
as we learned today you got to watch it carefully because the RSI can be below
and then you know out of the shaded area and then pop right back above it and so
you got to watch it I wasn't watching carefully because I was trying to teach
the method and make the video and so you know you got to be aware of both things
you got to watch both at the same time okay so and test it out on your own I
mean the RSI doesn't have to be five you don't have to use 60 and 40 you can try
different numbers this is just a combination that I've been watching for
a little while and these numbers seem to work out pretty well for me all right so
if you want more help with this I do offer coaching you can email me for the
coaching at David Modell at gmail.com and if you like this video please give
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more videos like this one thank you so much for watching and listening I'll
talk to you again soon