Trading Systems  |  JAN 2002

The Four Lines Trading System by Viktor Likhovidov

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.

by Viktor Likhovidov