RSI Revisited

A number of trading posts talk about the RSI(2) as a means to quick profit and for all practical purposes I believe it to be so. I did a post some time back that got good results from an RSI(8) but I think that if you adapt to the techniques that other traders are using you are probably better off in the long run. This is because you can exploit their weaknesses - and that is what you want to do.

This morning I read an article published by Trading Markets and reprinted in Yahoo Finance regarding several ways that they select stocks for trading.

One of these was using the RSI(2) and I quote - 2-Period RSI Below 2: These are stocks that have a 2-period RSI reading below 2 and are trading above their 200-day moving average. Our research shows that stocks trading above their 200-day moving with a 2-period RSI reading below 2 have shown positive returns, on average, 1-day, 2-days and 1-week later. Historically, these stocks have provided traders with a significant edge.

Needless to say in my never ending quest to rid the world of Simple Moving Averages this one caught my eye. I said - well - I have to test this theory out - so I wrote a filter.

It's a simple filter as filters go -

show stocks where close is between 15 and 85
and average volume(90) < 500000
and rsi(2) < 2


And I back tested it. I got some pretty nice results - 68% win percentage and 129.73 ROI. This is not too shabby.

Then I modified the filter to add a line - and close > ma(200) and back tested that. My results were 64% win percentage and 51% ROI. Wow - talk about a fall off in profit potential.

I modified it once more to change the line to close > ema(90) - the results were even worse - 55% win percentage, 44% ROI.

One more modification to close < ma(200). This time the results were almost the same as they were with no moving averages involved at all - 68 and 131 (a little improvement in the ROI).

A final modification just to close the loop to close < ema(90) and that improved the ema results to 66% and 127% ROI.

Bottom line - the moving average doesn't matter - RSI(2) < 2 with a play on the highest volume output that day is a good short term winner without considering a moving average. But if you are going to use a moving average of any kind - go low not high - in other words - below is better than above. Which just serves to reinforce our common refrain - distressed stocks do better than high flyer's in the short term.