I have long believed that simple setups can be highly effective in trading. All a simple strategy needs are a clear way to define the trend, a momentum indicator to assess strength and velocity of the price, and a reliable pattern for entry trigger.

In today’s newsletter, let us try and build a simple trade setup using only two indicators - Exponential Moving Average (EMA) and Relative Strength Index (RSI). The chart we will use is Renko charts because they show the trend of the instrument clearly. First, we will understand the role of the indicators, then build a bullish setup, and then look at some examples.

The aim of this setup will be to participate in the direction of the trend and capture momentum in the price as well.

Understanding EMA and RSI

EMA - The Trend Filter

When building a trade setup based on trend, Exponential Moving Average (EMA) lines serve as a reliable starting point. The EMA represents the average price of an instrument over a specified period, plotted as a line that responds more sensitively to recent price changes.

For this setup, EMA plays two roles: As a trend filter and as a Dynamic support or resistance.

When an instrument is trading above the EMA line, the instrument is in an uptrend and the EMA line will act as a Dynamic support.

When an instrument is trading below the EMA line, the instrument is in a downtrend and the EMA line will act as a Dynamic resistance.

RSI

The Relative Strength Index (RSI) is an oscillator that belongs to the category of momentum indicators. Its value is determined based on the average gains and average losses of the instrument over a specific time period. When average gains exceed average losses, the RSI increases; when average gains are less than average losses, the RSI decreases. Consequently, the RSI always oscillates within a fixed range between 0 and 100.

In an uptrend, the instrument’s average gains will be more than the average losses, and in a downtrend, the instrument’s average losses will be more than the average gains.

Consequently, in a sustained uptrend, the RSI generally remains above the 40 level, while in a prolonged downtrend, it rarely exceeds the 60 level.

Setting the parameters

We will be using Renko chart with 1% (Daily) as box size with 20, 30, and 40-brick EMA lines and RSI indicator.

The idea of this setup is simple: The instrument should be trading above the EMA lines and RSI should be above 40 RSI. We buy the instrument when the price takes a pullback towards the EMA lines and forms a bullish brick reversal.

An important element of this setup is selecting stocks that are relatively outperforming the broader market, as they offer higher potential for successful trades. The concept of Relative Strength, though widely used by traders, is rarely discussed openly. A simple strategy becomes highly effective with the right stock selection.

The course Trade Markets Using Relative Strength covers this in detail and is available through our exclusive membership, TNT One, which also includes access to several other courses and webinars. To improve your stock selection, explore the course using the link below.

The chart below is of BHARTIARTL on Renko chart 1% (Daily). The 20, 30, and 40 EMA lines are plotted along with RSI indicator. Observe the price was above the EMA lines and above 40 RSI all along. Now observe that when the price came near the EMA lines, it took support from the line, each time giving the opportunity to take a trade upon bullish brick reversal.

The Renko chart below of GLENMARK on 1% (Daily) shows the setup. Observe again how the price took support from the EMA lines while RSI was also above 40 level.

This article serves as a great starting point for diving deeper into the subject of combining EMA and RSI, and how this approach can unlock multiple trading opportunities. Once the trend is correctly identified, you can choose to participate through cash positions, futures, or options.

I hope you find this newsletter insightful. If you do, please share it with your trading friends. And do not forget to explore TNT One for structured and in-depth learning content.