The Four Lines Trading System by Viktor Likhovidov
Here’s a simple, reliable, universal system for
trading the markets.
The creation of a personal trading
system requires a personal
understanding of the nature of the
markets and the peculiarities of
market behavior. It’s also critical for
you to have a simple yet universal
and reliable strategy from the beginning. One
strategy I particularly like is based on a single
indicator and includes simple but powerful statistical
procedures for constructing reference lines that
generate trading signals.
THE FOUR LINES
When you are using the relative strength index (RSI)
— as well as many other oscillators — in trading,
the rule of thumb is to sell when RSI leaves the
overbought area and buy when it leaves the oversold
area. The market is usually considered overbought
when RSI is higher than 70 and oversold when RSI
is lower than 30. But a practical application shows
these generated trading signals are not reliable.
After the overbought/oversold levels are broken,
the chart frequently goes in the opposite direction,
resulting in too large a percentage of losing positions.
(For details on the RSI oscillator, see sidebar “RSI
oscillator and its main properties.”)
Usually, additional indicators are introduced in
order to improve an RSI-based trading system. (That
doesn’t necessarily mean the system becomes more
efficient, but it does become more complex.) It is
possible, and much easier, to test and analyze a
trading plan based on a single indicator.