Overview

This strategy combines the 123 reversal pattern and RSI momentum strategies to filter signals for high-probability entries at trend reversal points.

Principles

123 Reversal Strategy

This strategy is from the book "How I Tripled My Money in the Futures Market" by Ulf Jensen, Page 183. It identifies potential trend reversals during consolidations.

Specifically, it goes long when the close is higher than the previous close for 2 consecutive days and the 9-period Slow K line is below 50; it goes short when the close is lower than the previous close for 2 consecutive days and the 9-period Fast K line is above 50.

So essentially it uses the stochastic indicator's golden cross and death cross to determine potential reversals.

RSI Momentum Strategy

This strategy uses the ROC function to calculate price rate of change, and constructs a RSI indicator based on the price rate of change to determine momentum trends.

It goes long when RSI is below the buy zone, indicating accelerating upside momentum; it goes short when RSI is above the sell zone, indicating accelerating downside momentum.

Advantages

• 123 reversal pattern identifies potential reversal points after consolidations
• RSI momentum filters out false breakouts effectively
• Accumulation of signals from both strategies gives high-conviction entries

Risks

• 123 pattern prone to bull traps or false breakouts, needs filtering
• RSI still based on price, cannot fully avoid whipsaws
• Double signal accumulation may miss better entry points

Possible ways to reduce risks:

1. Tune Stochastic parameters to use longer period to define trend
2. Adjust RSI parameters to use wider buy/sell zones
3. Consider using just one signal for entries

Optimization Directions

• Test ROC periods to find optimal values for specific products
• Test 123 pattern logic, e.g. adjust fast/slow K lines
• Test RSI zone values to find optimal buy/sell ranges
• Try other indicators like MACD to replace Stochastic
• Test effect of using just one strategy signal

Conclusion

This strategy improves entry accuracy at trend reversals by requiring two confirming reversal signals. 123 pattern identifies reversals and RSI momentum verifies validity. Easy to optimize parameters for different products and preferences. But beware of missing entries from dual signal accumulation. Overall an effective framework for identifying reversal trends.