There are many ways to skin the technical analysis cat and two of them are the Relative Strength Index (RSI) and the Williams %R.
First the RSI. TAZ Trader reports on a six rule method from Trading Markets that is an "improved RSI(2)" method. Because I am always interested in any method that can be programmed into my modeler I adapted their method to my own. Their method exclusively followed the SPX or its derivatives while mine selected individual stocks. Now that isn't necessarily the same but for all practical purposes I don't buy the market so if it doesn't work on individual stocks I don't want to fool with it.
TAZ Trader then goes on to talk about his method that uses Williams %R. Apparently he prefers a three period Williams %R to the RSI(2).
So I wrote a couple of filters and here are my results -
The Trading Markets method output a 65% win ratio with a 105% ROI - this isn't bad.
The Williams %R(3) method output a 62% win ratio with a 150% ROI - this is just fine.
The RSI(2) method output a 72% win ratio with 162% ROI - that is excellent.
Here is the RSI(2) method -
show stocks where close is between 15 and 35
and average volume(90) < 500000
and rsi(2) < 5
and volume 1 day ago > volume 2 days ago
and volume > volume 1 day ago
Now I tried including a volume statement in both the Williams and the Trading Markets methods (although it isn't called for) and it only lessened their efficiency and effectiveness.
But here is an interesting aside - even though these are supposed to be extremely short term filters - if you hold the stocks you select using them you will hit some home runs in the next 20 days. The Williams %R filter had a whopping 6.58% net change over 20 days and the RSI(2) turned in a respectable 4.31. The Trading Markets method was a more pedestrian 2.5 not bad but nothing to get excited about.
I'm going to stay with the RSI(2) < 5 method as it seems to be better on the individual stock basis. But there is nothing wrong with using either the Williams %R or the Trading Markets methods if that's what you want to do.