Overview

This strategy combines the RSI indicator and weighted moving average for trend following trading. It goes long when RSI is above 60 and goes short when RSI is below 40, with the moving average verifying the trend condition. The 40-period RSI acts as a trend following indicator. The weighted moving average uses different weights to reduce the impact of short-term fluctuations. The strategy also employs stop loss and trailing take profit to control risks.

Strategy Logic

The strategy firstly calculates the RSI and weighted moving average. The RSI length is 20 periods and the weighted MA length is 20 with higher weights that reduce the impact of short-term volatility. It goes long when RSI is above 60 and weighted MA rate of change is below -1%. It goes short when RSI is below 40 and weighted MA rate of change is above 1%.

After opening long or short, stop loss and trailing take profit orders are placed simultaneously. The stop loss is set at 3 ATR from the current price. The initial trailing take profit activation is 4 ATR away, and trails in 3% increments. When price hits either stop loss or trailing take profit activation, the position will be closed.

The strategy also incorporates money management rules based on the fixed fractional position sizing approach. Whenever PNL hits a fixed amount, the order size is increased or decreased by a fixed amount.

Advantage Analysis

• RSI indicator can effectively track trends
• Weighted MA reduces the impact of short-term fluctuations, avoiding whipsaws
• Trailing take profit allows profits to be maximized
• Fixed fraction position sizing controls risk effectively

The overall edge is the ability to follow trends, while taking stop loss and trailing take profit measures to control risks, thus capturing significant gains in strong trends.

Risk Analysis

• False signals from RSI may cause unnecessary trades
• Forced to stop out when price breaches stop or trailing take profit levels, unable to keep following trends
• Aggressive money management rules may lead to large losses

The main risks come from the reliability of RSI signals and the stop loss/trailing take profit settings. Incorrect parameters may result in unnecessary closing of trades or losses beyond risk appetite. Breaking stop loss/take profit may also force unwarranted stop outs, losing the chance to continue trend trading.

Solutions include optimizing RSI parameters or adding other indicators for signal confirmation. Adjust stop/trailing take profit levels based on different products and volatility conditions. Also be prudent with money management rules to avoid excessive risks.

Optimization Directions

• Test other indicators together with RSI for signal confirmation, e.g. KD, MACD etc
• Optimize stop loss and trailing take profit parameters based on product characteristics and volatility range
• Try other money management techniques like fixed size trading, Kelly formula etc
• Add entry conditions like Bollinger breakouts, RSI divergences etc
• Consider adding positions on strong trends

There are many aspects to optimize. First is identifying other indicators to supplement RSI signals. Next critical step is optimizing stop loss/trailing take profit parameters based on historical performance. Money management can also switch to other types. Finally, entry, add-on conditions can be enhanced to pyramiding positions in strong trends.

Summary

The RSI trend following strategy has clear logic, using RSI for trend direction and weighted MA for confirmation. Its strength lies in trend trading, maximizing profits with stops/money management controlling risks. But RSI reliability and parameter optimization need improvement. We can look into enhancing signal indicators, stop/trailing parameters, money management methods etc to make the strategy more robust across different products.

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