RSI in Multiple Time-Frames

Just like we used RSI momentum indicator as a trend indicator in our previous articles, we can use other momentum indicators like MACD in a similar fashion too. In the last article, we used a 2-Period RSI to generate buy/sell signals after the trend was set by 200-SMA. In this article, we’ll be using a MACD as a trend indicator in a larger time-frame whereas RSI as an oscillator in a smaller time-frame. The following topics will be discussed in-depth with screenshots of Mudrex’s strategy canvas wherever necessary:

  • RSI vs MACD
  • Multiple Time-Frames
  • Strategy Description
  • Trade Analysis
  • Next in Series

RSI vs MACD

The RSI and MACD are both trend-following momentum indicators which originally indicate the momentum of the market but can also indicate trend when used in larger look-back periods and time-frames.  

MACD

The MACD is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA. The result of that calculation is the MACD line. A nine-day EMA of the MACD is called the “signal line”. Positive value of the signal line indicates that the 12-period EMA is greater than the 26-period EMA which is a bullish signal. Negative value of the signal line on the other hand is a bearish signal. Therefore, the overall trend can be set using the zero threshold of the MACD Signal Line.

RSI

RSI on the other hand will be used to generate buy/sell signals using the 70-30 OBOS thresholds. The catch here is that MACD will be used in a larger candlestick chart time-frame to set the overall trend whereas RSI will be used in a smaller candlestick chart time-frame to enter/exit the trades.

Multiple Time-Frames

If you are a short-term trader you might be focusing on short-term charts and trends. If you are a long-term trader you might be focusing on long-term charts and trends. However, when the short-term and long-term trends are in agreement you are probably right to be confident about a trade. This is the level of importance of using multiple time-frames to generate buy and sell signals.

We’ll be using a higher time-frame “trend chart” to define a predominant uptrend or a downtrend using MACD while a volatile lower time-frame “signal chart” to generate buy/sell signals using RSI. By now it might be clear as to why we always use a higher time-frame or look-back period for setting a trend whereas a smaller time-frame or look-back period to generate buy/sell signals.

Note: Do not confuse yourself between look-back periods and time-frames. Look-back periods are the periods of historical data that should be used in the calculation of the indicators. Time-frames are the frames of time in which the indicator is plotted on a candlestick chart. While both of them are used to change the extent of market history viewed to make decisions, they’re a different concept and have a different implementation altogether.

The following pairs of time-frames can be used to define your own trend/signal charts:

Trend Chart (Predominant)Signal Chart (Volatile)
15 to 30-minute1-minute
1-hour5-minute
4-hour15 to 30-minute
1-day1-hour
1-week1-day
1-month1-week
Trend/Signal Time-Frame Pairs

Setting Up

We’ll be using default settings and thresholds of both MACD and RSI. MACD will be used in a larger time-frame T1 of 1D whereas RSI will be used in a smaller time-frame T2 of 1H. The time-frames can be changed by going in the “advanced parameters” feature on Mudrex whereas their values are set while doing a back-test.

We’ll be using a slightly different approach while using RSI here. Earlier we generated the buy signal when RSI crossed down 30 whereas sell signal when RSI crossed up 70. However, some traders believe that the buy/sell signal should be called after the RSI has valleyed below 30 and peaked above 70. Hence we’ll generate a buy signal when RSI has reversed and crossed up 30 and sell signal when RSI has reversed and crossed down 70.

Buy when:

  1. MACD Signal Line > 0 [T1]
  2. RSI crosses up 30 [T2]

Sell when:

  1. MACD Signal Line < 0 [T1]
  2. RSI crosses down 70 [T2]

Building on Mudrex

T1 time-frame is set using the “Tick interval” feature in the indicator block for MACD Signal > 0 as shown below:

T2 time-frame is set similarly in the indicator block for RSI crosses up 30 as shown below:

Joining these two using an AND block to generate a buy signal:

Similarly, a sell signal can be generated when MACD Signal in T1 < 0 AND RSI in T2 crossed down 70.

Overall strategy will look like this:

Overall Strategy

We need to set the values of time-frames T1 and T2 while performing a backtest as shown below:

Trade Analysis

Look how the buy signal was generated when MACD > 0 whereas the sell signal was generated when MACD < 0 in a 1D chart resolution:

Similarly the RSI signal can be analysed on a 1H chart resolution.

The above shown generated profits as high as 62% in a single trade. This is how effective using RSI with other indicators in multiple time-frames can be. Instead of using the MACD for defining the trend, we can use other trend indicators like CCI and Stochastic in a similar fashion.

Checkout the rest of the articles if you haven’t already:

Part 1: Introduction to RSI
Part 2: Overbought-Oversold Strategy
Part 3: Midline Crossover Strategy
Part 4: Fast-Moving RSI
Part 5: RSI in Multiple Time-Frames

In this article, we briefly explained what MACD is and how to use it with RSI. However, MACD has innumerable use cases of it’s own and is one of the most versatile and widely used indicators. The next MasterClass will be an exhaustive set of articles on the implementation of Moving Average Convergence Divergence (MACD) only on Mudrex!

Stay tuned!

Links

A few quick references below: