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jswanson

RSI And How To Profit From It

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We all know there are no magic indicators but there is an indicator that certainly acted like magic over the past 10 years or so. What indicator is it? Our reliable RSI. In this article we are going to look at two trading systems that were first talked about in the book, ”Short Term Trading Strategies That Work” by Larry Connors and Ceasar Alvarez. It has been well established in various articles on the web that a 2-peirod RSI on the daily chart of the stock index markets has been a fantastic tool for finding entry points. Sharp price drops in the S&P E-Mini futures during bullish markets have historically (since the year 2000) been followed by reversals. These reversals can often be detected by using the standard RSI indicator with a period value of two. Place this indicator on a daily chart and look for points when the indicator falls below five, for example. These extreme low points are buying opportunities.

 

RSI2_Indicator.png

 

RSI(2) SYSTEM

We can turn this into a simple strategy to test the effectiveness of the RSI(2) indicator on the E-mini S&P. In short, we wish to go long on the S&P when it experiences a pullback in a bull market. We can use a 200-day simple moving average to determine when we are in a bull trend and using a 2-period RSI to locate high probability entry points. We can then exit when price closes above a 5-day simple moving average. The rules are clear and simple:

 

  • Price must be above its 200-day moving average.
  • Buy on close when cumulative RSI(2) is below 5.
  • Exit when price closes above the 5-day moving average.
  • Use a $1000 catastrophic stop loss.

 

The system backtest was performed from September 1997 through March 2012. A total of $50 for commissions and slippage was deducted per round trip. Below is a chart of what this system would look like along with the system results.

 

RSI(2) SYSTEM RESULTS

Net Profit: $17,163

Percent Winners: 67%

No. Trades: 64

Ave Trade: $268.16

Max Drawdown: -$5,075

Profit Factor: 1.90

 

RSI2_Strategy.png

 

RSI2_Strategy_EQ_Curve.png

 

These results are great considering we have such a simple system. This demonstrates the power the RSI(2) indicator has had now for well over a decade. Just with this concept alone you can develop several trading systems. For now, let’s see if we can we improve upon these results.

 

ACCUMULATED RSI(2) STRATEGY

 

Larry Conners adds a slight twist to the RSI(2) trading system by creating an accumulated RSI value. Instead of a single calculation we will be computing a running daily total of the 2-period RSI. In this case, we are going to use the total of the 2-period RSI for the past three days. When you keep an accumulated value of the RSI(2) you smooth out the values. Below is a chart comparing the standard 2-period RSI indicator with an accumulated 2-period RSI indicator. You can see how much smoother our new indicator is. This is done to reduce the number of trades in hopes of capturing the quality trades. In short, it’s an attempt to improve the efficiency of our original trading system.

The rules are:

 

  • Price must be above its 200-day moving average.
  • Buy on close when cumulative RSI(2) of the past three days is below 45.
  • Exit when RSI(2) of the close of current day is above 65.
  • Use a $1000 catastrophic stop loss.

 

RSI_vs_RSI_Accum.png

 

ACCUMULATED RSI(2) SYSTEM RESULTS

 

Net Profit: $17,412

Percent Winners: 67%

No. Trades: 52

Ave Trade: $334.86

Max Drawdown: -$4,850

Profit Factor: 2.02

 

RSI2_Accum_Strategy.png

RSI2_Accum_Strategy_EQ_Curve.png

 

Conclusions

 

So which one is better? The accumulated strategy worked as intended. It increased the efficiency of the standard RSI(2) trading system by reducing the number of trades, yet produced about the same amount of net profit. As a bonus, the drawdown was even slightly smaller. While both systems do a fantastic job, the accumulation strategy may do a slightly better job. The Accumulated RSI(2) strategy will work well on the mini Dow as well as the two ETFs, DIA and SPY.

 

Download

 

The EasyLanguage code is available below as a free download. There is also a TradeStation workspace. Please note, the trading concept and the code as provided is not a complete trading system. It is simply a demonstration of a robust entry method that can be used as a core of a trading system. So, for those of you who are interested in building your own trading systems this concept may be a great starting point.

 

DOWNLOAD HERE

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JSW... thanks for the article...

 

I'm a big fan of Connors and coded up his 7 strategies for ETFs in Omnitrader Pro...

 

i've been running them for about a year now with excellent results.

 

however, i'm curious about your choice of $1000 catastrophic stop loss on the ES. Connors dedicates chapter 6 in the book you reference about stop losses and presents a case for not using them.

 

Connors was going to speak at a local trading organization meeting last month and I had planned on asking him directly about this while providing a few examples of some pretty serious losses that would no doubt wipe out a smaller account considering position sizing limitations. the Q&A never happened as i was unable to attend the meeting and as it turned out neither was he.

 

fwiw, one thing i did do within my 7 ETF strategies was to add an additional filter to only allow signals on strategies that backtested over 7 years with hit rate >= 85. additionally within those strategies that meet that threshold they are ranked by profit per trade.

 

you should see the equity curve:cool:

 

back to your example: i have been hesitant to use the RSI strategy variations with futures and holding overnight because of the drawdown issue.

 

Again, just curious about how you came to use $1000 catastrophic loss. Also, what account size and lot size are you using in your backtesting?

 

for example, i could see where a $10K account trading 1 contract with the $1K stop loss could possibly play out w/o blowing up an account.

 

Thanks,

 

-phil

Edited by Phil-n-Texas

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Very few trades in the testing period. Performance can be random and a statistical fluke. IMO nobody with minimum experience in trading system development relies on 60 or 70 trades in more than 15 years of data.

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The best way to profit from RSI is by steering clear of it. Basing your trading on two moving averages! There's no such thing as oversold / overbought. When will people realize the markets ain't what they were and the tried n tested methods are old hat.

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JSW... thanks for the article...

 

I'm a big fan of Connors and coded up his 7 strategies for ETFs in Omnitrader Pro...

 

i've been running them for about a year now with excellent results.

 

however, i'm curious about your choice of $1000 catastrophic stop loss on the ES. Connors dedicates chapter 6 in the book you reference about stop losses and presents a case for not using them.

 

Connors was going to speak at a local trading organization meeting last month and I had planned on asking him directly about this while providing a few examples of some pretty serious losses that would no doubt wipe out a smaller account considering position sizing limitations. the Q&A never happened as i was unable to attend the meeting and as it turned out neither was he.

 

fwiw, one thing i did do within my 7 ETF strategies was to add an additional filter to only allow signals on strategies that backtested over 7 years with hit rate >= 85. additionally within those strategies that meet that threshold they are ranked by profit per trade.

 

you should see the equity curve:cool:

 

back to your example: i have been hesitant to use the RSI strategy variations with futures and holding overnight because of the drawdown issue.

 

Again, just curious about how you came to use $1000 catastrophic loss. Also, what account size and lot size are you using in your backtesting?

 

for example, i could see where a $10K account trading 1 contract with the $1K stop loss could possibly play out w/o blowing up an account.

 

Thanks,

 

-phil

 

I trade futures, so there is minimal over night risk since the market is actively trading and my stop can get hit without fear of a large gap the next day. Furthermore, my studies have also demonstrated there is a long bias on the overnight session. Many people fear holding over night. Such thinking is common wisdom, but holding overnight can be very beneficial.

 

There is a weekend risk since the market is not open.

 

I picked $1,000 from a backtest study. I wanted a stop simply because most people don't trade without a stop. I trade a very similar RSI system with a $500 stop. If you are not going to trade with a stop, options may be a good idea.

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The best way to profit from RSI is by steering clear of it. Basing your trading on two moving averages! There's no such thing as oversold / overbought. When will people realize the markets ain't what they were and the tried n tested methods are old hat.

 

The two-period RSI has worked wonders over the past 10 years on the ES and the numbers show it. But thanks for your opinion.

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Very few trades in the testing period. Performance can be random and a statistical fluke. IMO nobody with minimum experience in trading system development relies on 60 or 70 trades in more than 15 years of data.

 

Here is the 2-period RSI system on the S&P Cash index going back to 1992. Trading a fixed lot of 100 shares.

 

RSI2_SPX.png

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Looks very nice.. Can the code be generated for using cumulative RSI in Metastock.

 

Sorry, but not familiar with Metastock otherwise I would be happy to convert it. Maybe there someone else on this forum that can do this?

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If you rsi is so good, why are you vending it for a few dollars on a forum. Buying every low and selling every high on a 30min chart has worked well over the last 10 years too! And with hindsight, I can post a chart showing this. Any newbies want to send me $100 I can also share my cointoss indicator that I use a $500 stop with. Doesn't matter how you dress it

up, BS is BS.

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If you rsi is so good, why are you vending it for a few dollars on a forum. Buying every low and selling every high on a 30min chart has worked well over the last 10 years too! And with hindsight, I can post a chart showing this. Any newbies want to send me $100 I can also share my cointoss indicator that I use a $500 stop with. Doesn't matter how you dress it

up, BS is BS.

 

This is all educational material I post here on Traders Laboratory. It's the very research I use to trade the markets. You don't have to believe it or accept it. Read it and if you don't have anything constructive to say or don't find it useful - then so be it.

 

The system posted in this thread is not a complete trading system. If you read the article you would have understood this. It's a launching pad or a study. A person interested in creating his/her own system can use this or the can ignore it. But as it stands, it's not a complete system.

 

I do trade a system that is a modified version of what I posted. I also trade other systems. You're right, I don't have to sell anything. However, I enjoy running a business. I've been running some type of business since I was in high school. My goal in life is to have multiple streams of income. It's called diversification and living my life the way I want to.

 

Have a great weekend.

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@Valuetrader Would you mind posting the code please for your system that buys every low and sells every high on the 30 min chart? I know $100 doesn't mean much at all to you and you aren't realy a believer in system trading, so you won't mind at all sharing such insignificant code, but I'm sure many others would be fascinated to see it. You know once yo uhave posted it, I'm sure it will help built your reputation as an honest and reputable person.

 

Regards,

Adrian

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@Valuetrader Would you mind posting the code please for your system that buys every low and sells every high on the 30 min chart? I know $100 doesn't mean much at all to you and you aren't realy a believer in system trading, so you won't mind at all sharing such insignificant code, but I'm sure many others would be fascinated to see it. You know once yo uhave posted it, I'm sure it will help built your reputation as an honest and reputable person.

 

Regards,

Adrian

 

Adrian. Oh Dear!

 

At the end of the post you are referring to, I wrote " Doesn't Matter How You Dress It Up Bs is Bs".

 

So from this sentence anyone with a functioning brain could have guessed the general theme of the reply, but not you Adrian!

 

In your hurry to supply a witty retort, you've completely missed the point of my post, and possibly made yourself look stupid. Allow me to answer in a manner that you may understand.

 

I WAS BEING SARCASTIC.

 

I was pointing out that regardless of what indicator / system used it can be proved to be successful with hindsight.

 

Cointoss System, again Adrian, I was being Sarcastic.

 

I'm not a vendor & I'm not selling or recommending anything so why should I give a shit about my reputation. All my codes are posted free on this forum.

 

Maybe Adrian, you should contact the moderator and suggest a new rule forbidding questioning vendors posts, as you seem so protective over them.

 

 

 

A healthy scepticism prevents us from all being robots Adrian. Now go tidy your room.

Edited by ValueTrader

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@Value Trader. Clearly you missed the point of my post as well. How ironic, when yours was being sarcastic, as was plainly obvious by anyone with a brain. No wonder you think it is all BS. BTW..what is BS to some is fertilizer to others. Something you might wish to giive some thought to. So seriously, there is only one perosn who looks silly here, and it definitely ain't me.

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BTW ValueTrader, you should show a little more respect to someone who has generously posted with full discloser a profitable trading system, something very very rare on any forum. Your arrogance shows you clearly have some serious issues and likely resent him for being profitable when you can't do the same. And please don't bother writing a come back with some snide remark to try and defend your situaion. It is truly black and white. You have your views and the world has another....its as simple as that.

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Why you so protective of RSI. Trying to get it to work? lol

 

You call me arrogant, but you feel it correct to speak on behalf of the world vs me!

 

 

PM me and I'll give you the company I'm employed by details. If you then contact the FSA in the UK they'll be able to confirm My P&L and account size.

 

I trust you'll do the same, however I don't think your bedroom is regulated by the FSA.

 

I'll let you have the last word Adrian, you need practice with your spelling!

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Hi Phil-n-Texas,

 

Thanks for your post. I also have OT Pro. I can probably figure out how to filter on hit rate and select based on profit per trade, but if you have any suggestions, they would be great. Do you combine the strategies into a single strategy in OT Pro and require some n number of them to fire, or just allow all of them to fire signals and then filter the way you described?

 

Last question - promise :) - is the equity curve you mention from live trading or from OT reports? I've never fully trusted the OT backtest results.

 

The separate discussion about stops is a good one. I would want to have some kind of disaster stop in place - the flash crash would be a good example of why. But in general, selecting the "right" stop is very difficult and I have also seen system results actually go down thanks to stops!

 

Thanks,

 

Gordon

 

 

JSW... thanks for the article...

 

I'm a big fan of Connors and coded up his 7 strategies for ETFs in Omnitrader Pro...

 

i've been running them for about a year now with excellent results.

 

however, i'm curious about your choice of $1000 catastrophic stop loss on the ES. Connors dedicates chapter 6 in the book you reference about stop losses and presents a case for not using them.

 

Connors was going to speak at a local trading organization meeting last month and I had planned on asking him directly about this while providing a few examples of some pretty serious losses that would no doubt wipe out a smaller account considering position sizing limitations. the Q&A never happened as i was unable to attend the meeting and as it turned out neither was he.

 

fwiw, one thing i did do within my 7 ETF strategies was to add an additional filter to only allow signals on strategies that backtested over 7 years with hit rate >= 85. additionally within those strategies that meet that threshold they are ranked by profit per trade.

 

you should see the equity curve:cool:

 

back to your example: i have been hesitant to use the RSI strategy variations with futures and holding overnight because of the drawdown issue.

 

Again, just curious about how you came to use $1000 catastrophic loss. Also, what account size and lot size are you using in your backtesting?

 

for example, i could see where a $10K account trading 1 contract with the $1K stop loss could possibly play out w/o blowing up an account.

 

Thanks,

 

-phil

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My spelling ability is fine ValueTrader, but posts like yours simply aren't worth my time to bother checking. I only do that with people I respect. But I'm well versed with people who need to resort to abusing a posters spelling, as it is a textbook sign they know they havent a leg to sptand on, and are simply trying to deflect the discussion from their own baseless claims and accustations. Next thing you'll be making a reference to sleeping with my mother I presume LOL. That would truly be sad, as only the lowest scum on the planet take that line.

 

You also seem to have a severe inferiority complex, as you like belittling people who provide GOOD information. So you are hardly the kind of person we wish to have on this forum. Quite sure at least 90% of readers will agree on that.

 

Protective of the RSI?? LOL What on earth are you talking about? It is now even more clear you need to make yourself feel good by attacking others, because you obviously don't even bother reading people's posts properly, nor even understand what they are saying. I made no mention of the RSI, nor whether I had an affinitity with it. How bizarre. In fact, if it wasn't obvious to anyone with an IQ > 50, my first post had absolutely nothing to do with the actual content of the trading model at all.

 

I didn't 'call' you arrogant, I simply stated a factual situation. Nothing more.

 

Why on earth would I care where you were employed? I don't even care who you are. And I certainly have no interest in massaging your misaligned ego trip further.

 

Finally, you seem to have an affinity with bedrooms. I am assuming you are talking about your own situation. Do you live out of a rented studio apartment? Certainly you do not know who I am, nor my living situation. Therefore, only a complete fool would even make such absurd guesses at my living situation LOL Truly hilarious. How embarassing for you, as clearly, by suggesting I am the one looking foolish, it is in fact you look about as dumb as anyone could possibly portray themselves.

 

PLEASE do not post to the Traders Laboratory forum unless you can post something constructive.

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My question to you ValueTrader is, why are you reading a Thread under Automated Trading when you don't believe in it? Surely it would be a serious waste of your time, or are you simply out to prop up your own insecurities and ego by attacking others for their generous posts? I am fascinated to understand the mind of people who are insecure, as they are usually the ones we take the money from in the end.

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Very few trades in the testing period. Performance can be random and a statistical fluke. IMO nobody with minimum experience in trading system development relies on 60 or 70 trades in more than 15 years of data.

 

If you investigate the source (Connors) of the strategy that JSwanson is discussing in brief here, you will find extensive testing over a wide range of instruments over many decades. As the strategy concept is to sell strength and buy weakness, you can also find other ways to test the general concept without relying on the particular triggers given in this strategy (in fact, JSwanson shows the results of a 3-Up Close, 3-Down close rule in another thread).

 

Of far more concern that the limited number of data points would be the number of variable parameters: length of MA, length of RSI, OB level of RSI, OS level of RSI, RSI input data (close as opposed to open, high, low, avgprice etc). You would want to see how robust the strategy remained as the parameters were varied.

 

Hope that's helpful.

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@BlueHorseshoe A statistician will tell you, you need 30 trades to be statistically significant. When it comes to trading though, they haven't a clue what they are talking about. Some traders will tell you they wish to see hundreds or even thousands of trades to validate a model. They also do not know what they are talking about. I have absolutely no problems at all with the sample of 60 trades or so over the large time period. Why? Because when you understand markets and what is important, then you simply don't need a sample of hundreds of trades. Do you think Warren Buffet needs to see hundreds of sample trades to know that buying a business at a low price relative to its earning potential will work or not? Obviously not. Those with experience 'just know' because its obvious. When it comes to trading models, what's important is testing over different market environments, and understanding how and if the model is designed to deal with them adequately. Certainly you would have to be extremely patient, and be trading other models as well beside the RSI model, as the trades are few and far between, but that is irrelevant as to its validity or not. Now if a short term model was presented with 60 trades over the last month was presented, then I would laregly dismiss it until it was tested over a much larger database. Why? Because 1 month of intraday data is NOT indicative at all, of the type of market environments that lie ahead in coming years.

 

The robustness of the variables is also of clear importance, but even there you need to be very careful. You can't simply test an RSI from 1 to 10 and see if the model keeps working. Markets are more complex than that. A 10 period RSI won't reach the same extremes a 2 period will. So you might try adjusting the oversold level with it, but even there it isn't that simple. A 2 period RSI will show situations that simply cannot occur with larger period RSI's. This is why creating a successful and robust model is far more difficult than most think. It requires a great understandsing of markets in the first place.

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I would want to have some kind of disaster stop in place - the flash crash would be a good example of why.

 

The flash crash would actually be a very good example of why not to have a stop in place (in the case of this specific strategy). The flash crash would barely have made a dent in your equity curve, as the maket bounced significantly the next day. So, assuming you could meet margin calls throughout the crash you would have been fine.

 

Last summer's mammoth sell-off, on the other hand - well there's the time you needed a stop in place alongside the RSI!

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The flash crash would actually be a very good example of why not to have a stop in place (in the case of this specific strategy). The flash crash would barely have made a dent in your equity curve, as the maket bounced significantly the next day. So, assuming you could meet margin calls throughout the crash you would have been fine.

 

Last summer's mammoth sell-off, on the other hand - well there's the time you needed a stop in place alongside the RSI!

 

I agree with this 100%.

 

There are times when a stop will really hurt you. Yet, I never trade with out them.

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re: discussion on backtest sample...

 

here's the latest on my list of 20 ETF's running 7 strategies per Connors...

 

this is set for backtest of 5 years and i've marked arrows for backtest hit-rate(BTHR) and backtest number of trades(BTN)...

 

since the strategies are dependent on the SMA(200) i had to adjust the backtest range such that there was enough data to plot and calculate the SMA(200)... some ETFs have far more data than 5 years but some do not so I am using a setting that will address all of the ETFs on the list.

 

symbols with zero's are those that didn't make the threshold settings for hit-rate over backtest period.

 

note that for EWZ the BTHR shows only 84... this is for the combined BTHR for all strategies >= 85 BTHR... reason it is below threshold is that individually the strategies meet the threshold but combined they do not because of one or the other being "in-trade"...

 

a bit confusing but not really if you've worked with the voting matrix in OT and understand how it works...

 

2012-04-09_0818.png

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Portfolio simulation using various allocation methods and backtest 5 years (1250 days).

 

signals only with BTHR >= 85

 

Fixed trade size = 100 shares

% of Equity = 5%

Fixed $ amount = $1000

Fixed Risk = 2% with 1 ATR(50) stop loss

 

2012-04-09_0856.png

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Speaking at a press conference, he rejected the European Union’s offer to eliminate tariffs on cars and industrial goods, accusing the bloc of ‘being very bad to us.’ He insisted that Europe would need to source its energy from the US, claiming the US could ‘knock off $350 billion in one week.’   The EU, meanwhile, backed away from a proposed 50% retaliatory tariff on American whiskey, opting instead for 25% duties on selected US goods in response to Trump’s steel and aluminium tariffs.     Volatile Wall Street Adds to the Drama   Wall Street experienced wild swings on Monday as investors processed the rapidly evolving trade conflict. The S&P 500 briefly fell 4.7% before rebounding 3.4%, nearly erasing its losses in what could have been its biggest one-day jump in years—if it had held. The Dow Jones Industrial Average sank by as much as 1,700 points early in the day but later climbed nearly 900 points before closing 349 points lower, down 0.9%. The Nasdaq ended up 0.1%.   The brief rally was fueled by a false rumour that Trump was considering a 90-day pause on tariffs—rumours that the White House quickly labelled ‘fake news.’ The market's sharp reaction underscored how desperate investors are for any sign that tensions might ease.   Oil Markets in Focus: Goldman Sachs Revises Forecasts   Crude prices also reflected the uncertainty, with US crude briefly dipping below $60 per barrel for the first time since 2021. As of early Tuesday, Brent crude was trading at $64.72, while WTI hovered around $61.26.   Goldman Sachs, in a note dated April 7, lowered its average price forecasts for Brent and WTI through 2025 and 2026, citing mounting recession risks and the potential for higher-than-expected supply from OPEC+.       Under a base-case scenario where the US avoids a recession and tariffs are reduced significantly before the April 9 implementation date, Goldman sees Brent at $62 per barrel and WTI at $58 by December 2025. These figures fall further to $55 and $51, respectively, by the end of 2026. This outlook also assumes moderate output increases from eight OPEC+ countries, with incremental boosts of 130,000–140,000 barrels per day in June and July.   However, should the US slip into a typical recession and OPEC production aligns with the bank’s baseline assumptions, Brent could retreat to $58 by the end of this year and to $50 by December 2026.   In a more bearish scenario involving a global GDP slowdown and no change to OPEC+ output levels, Brent prices might fall to $54 by year-end and $45 by late 2026. The most extreme projection—based on a simultaneous economic downturn and a full reversal of OPEC+ production cuts—would see Brent plunge to below $40 per barrel by the end of 2026.   Goldman noted that oil prices could outperform forecasts significantly if there was a dramatic shift in tariff policy and a surprise in global demand recovery.   Cautious Optimism, But Warnings Persist   With both Washington and Beijing showing no signs of backing down, markets are likely to remain volatile in the days ahead. Investors now turn their attention to upcoming trade meetings and policy decisions, hoping for clarity in what has become one of the most unpredictable trading environments in recent years.   Always trade with strict risk management. Your capital is the single most important aspect of your trading business.   Please note that times displayed based on local time zone and are from time of writing this report. Click HERE to access the full HFM Economic calendar.   Want to learn to trade and analyse the markets? Join our webinars and get analysis and trading ideas combined with better understanding of how markets work. Click HERE to register for FREE!   Click HERE to READ more Market news.   Andria Pichidi HFMarkets   Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. 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