High Probability ETF Trading: RSI Trading Strategy

Thanks for reading. Today we are going to talk about an excellent trading strategy based upon the RSI or Relative Strength Index. As much as I would love to take all of the credit for this trading strategy, the real credit goes to Larry Connors and Cesar Alvarez.

On August 31, 2017, TradingSchools.Org published are an article titled: High Probability ETF Trading: 3-Day High Low Method.

In that article, I simply coded the exact strategy that Larry and Cesar described in their book. Nothing more and nothing less. The results were excellent. Considering that the book and the strategy were published in 2009, it is remarkable that the strategy has actually outperformed the original sample period. In other words, the strategy has stood the test of time. The real-time performance is actually much better than the sample performance.

If you have spent any amount of time programming trading strategies, then you probably already know that this is a nearly impossible feat.

So, I have to give a lot of credit to Larry and Cesar for gifting the trading community with this precious public gem. And considering that the book costs only $10, its an amazing value.

Lets now jump into yet another excellent trading strategy published in the book. The title of the trading strategy is The RSI 25 and RSI 75.

Yep, you guessed it. This simple strategy is based upon one of the most common technical indicators, the Relative Strength Index. I will not be spending too much time talking about the RSI or Relative Strength Index because most traders are already familiar with this common indicator. So let’s jump into the strategy, and talk about the tools that I personally use to research the market.

Trade Navigator: my favorite research platform

All of the strategies published on TradingSchools.Org were developed and tested using Trade Navigator. They are all freely available and can be obtained by simply emailing me directly at emmett@tradingschools.org. I am also in the process of creating a resource page where all strategies and research can be downloaded and openly discussed. Yes, I am endorsing Trade Navigator. However, I am not being paid to write nice things about them. (though I should be!)

Trade Navigator is ridiculously easy to learn. In my opinion, it is the very best trading and research platform for aspiring systems traders that have zero technical skills and no desire to learn a ridiculously difficult scripting language like C#, R, Python, or .Net.

In addition, with Trade Navigator you can pick up the phone and quickly speak with an actual human being that will bend over backward to help you code your trading strategies. A big thanks to Glen Larson for providing TradingSchools.Org readers will a free trial of the Platinum Edition of Trade Navigator. The free trial also includes the entire database of historical data.

Most “free trial” trading software includes only a snippet of usable historical data. Glen makes sure that your free trial includes the full arsenal of data: tick, bar, daily, custom. The whole enchilada.

Now that I got that “plug” out of the way, lets dive into the trading strategy.

The RSI 25 and RSI 75 ETF trading strategy: LONG SIDE

The following are the exact rules for Long signals, using only ‘daily’ bar data:

  1. The ETF is above its 200-day moving average.
  2. The 4-period RSI closes under 25. Buy on the close.
  3. Exit when the 4-period RSI closes above 55.

Test the strategy on the recommended 20 highly diversified ETF’s. List and description included below:

Symbol Linked to Complete Description Quick Description
DIA Diamonds Trust The Dow Jones Industrial AverageSM (DJIA) is composed of 30 “blue-chip” U.S. stocks.
EEM iShares Emerging Markets Exposure to large and mid-sized companies in emerging markets.
EFA iShares MSCI EAFE Exposure to a broad range of companies in Europe, Australia, Asia, and the Far East.
EWH iShares Hong Kong Exposure to large and mid-sized companies in Hong Kong.
EWJ iShares Japan Exposure to large and mid-sized companies in Japan.
EWT iShares Taiwan Exposure to large and mid-sized companies in Taiwan.
EWZ iShares Brazil Exposure to large and mid-sized companies in Brazil.
FXI iShares China Exposure to large and mid-sized companies in China.
GLD SPDR Gold Shares The first US traded gold ETF and the first US-listed ETF backed by a physical asset.
ILF iShares Latin America Exposure to large, established companies in Latin America.
IWM iShares Russell 2000 Exposure to small public U.S. companies.
IYR iShares Dow US Real Estate Exposure to U.S. real estate companies and REITs, which invest in real estate directly and trade like stocks.
QQQ PowerShares NASDAQ 100 Exposure to largest non-financial stocks on Nasdaq.
SPY SPDR SP500 The S&P 500 Index is a diversifed large cap U.S. index that holds companies across all eleven GICS sectors.
XHB SPDR SP500 Home Builders Exposure to home building products and producers.
XLB SPDR Materials Exposure to materials producers: chemical, construction, packaging, mining, paper, etc.
XLE SPDR Energy Sector Exposure to the energy sector of the SP500.
XLF SPDR Financial Sector Exposure to insurance, banks, thrifts, RE trusts, mortgage finance, consumer finance of SP500.
XLI SPDR Industrial Exposure to defense, aerospace, marine, machinery, airlines and air freight.
XLV SPDR Health Care Exposure to pharmaceuticals, health care equipment, health care related produces and services.

Note: the book makes no mention of position size or stop loss. For the benefit of the audience, I have tested the strategy using a position size of $2,000, with a $500 stop loss per trade.

The following are results of just the long-only trades:

RSI Trading Strategy Long Only

What really jumps out is smoothness of the equity curve. The profit factor of 2.62, with a sample size of over 1600 trades is just awesome. What makes this strategy nice and easy is that traders with a puny trading account can easily implement the strategy without overleveraging and exposing themselves to massive risk per trade.

The RSI 25 and RSI 75 ETF trading strategy: SHORT SIDE

The following are the exact rules for Short signals, using only ‘daily’ bar data:

  1. The ETF is below its 200-day moving average.
  2. The 4-period RSI closes above 75. Sell Short on the close.
  3. Exit when the 4-period RSI closes below 45.

Test the strategy on the recommended 20 highly diversified ETF’s. Use a $2000 per trade size and a $500 stop loss.

The following are results of just the short-only trades:

RSI Short ETF Trading Strategy

RSI Short Side Equity Curve

Some readers are probably looking at the short side results and might be thinking “ugg, this doesnt look very good.” Wrong answer. For the 15 years, global asset prices have basically only gone UP. Whenever you can find a short side strategy catches the ‘Bear’ then you better take notice. The next ‘Bear’ will eventually happen, it always does. You need to have short side strategies in place. Personally, this short side equity curve looks beautiful. You simply must keep the short side as part of the arsenal.

The RSI 25 and RSI 75 ETF trading strategy: Both LONG and SHORT

The following are the results of the Long side and the Short side combined into a uniform trading strategy. This is where the ‘rubber hits the road.’

RSI Trading Strategy combined results

RSI Trading Strategy combined results equity curve

Notice the symmetrical consistency? This is an obvious edge. For the past 15+ years, this simple strategy just keeps chugging along. Catching the BULLS and the BEARS. Anyone that has been around this game for awhile knows how difficult finding this sort of trading strategy.

Wrapping things up

Thanks for making it this far! Truth be told, I can talk about trading strategies until I am blue in the face. For me, trading and investing isn’t so much about making money…its about the discovery. Its about uncovering and discovering what nobody else it seeing. Its just fun.

Will the edge continue? I believe so. The sad and pathetic truth is that most people cling to the distorted fantasy of ‘day trading’. That they can quickly buy and sell stocks in a fraction of a second, and make $1k per day. The hard and cold reality is that the only people that make money at day trading are the people selling fantasy trading educational courses, software, and expensive mentoring.

Yes, its true than some folks can pull off the day trading dream. For awhile. But over the long haul, they usually pay whatever profits to the broker executing the trades. Its a terrible mountain of pain that newbies should avoid.

Instead, focus on doing what everyone else is not doing.

  1. Stop buying expensive and useless indicators.
  2. Stop listening to trading Guru’s and day trading charlatans.
  3. Invest your time and energy into learning how to program and test trading strategies.
  4. Zone out the world. Let your intuition lead you. Validate everything with science.

Once again, thanks for reading. For those interested, you can download a free copy of Trade Navigator through this link. (No, am not being paid)

And if you are interested in purchasing the book in which this review was written, you can find the link below: (Yes, I earn .70 cents if you purchase the book)

Dont forget to leave a comment below. And for all my ‘haters’ please pick apart this strategy, I am confident that I can defend this little dandy.

 

 

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Morgan
Morgan (@guest_5057353)
5 months ago

Im completely geeking out on coding. Its….cathartic. Does that even make sense? like….its enjoyable. Anyways….sorry. not trying to spam ya. I was trying to look up Al Brooks net worth, and found your website talking mad logical shit. Kinda love it.

Morgan
Morgan (@guest_5057352)
5 months ago

You just….post free shit like this!? Thats awesome.

I also saw you saying someone could email you for coding help!?!? my man! I love how salty your reviews are! Thanks brother

Sean
Sean (@guest_5056932)
8 months ago

Emmit,

Now that brokers like TDAT have free commissions on stocks, would you please run a new equity curve on the method and paste it into the web page, using a time period when commissions are free – Please?
— Well, I guess if free commissions are going to have any effect on method performance then the data base you use has to be from a broker that has free stock commissions.

What software and database is generating the equity curve?

Sean
Sean (@guest_5056930)
8 months ago

I was able to get the Long and Short equity curve to load by right clicking on an icon that was there where the curve should be – Right Click – Load Image.

Sean
Sean (@guest_5056929)
8 months ago

Emmitt, I think the “Both LONG and SHORT” equity curve is missing.

Nick
Nick (@guest_5056677)
9 months ago

“ The 4-period RSI closes under 25. Buy on the close.”

Herein lies the problem – you cannot buy (or sell for the short side) on the close after the close. Rerun your back tests using buy on the open the next day and you will see what I mean…

Nate
Nate (@guest_5056490)
10 months ago

i tried tradenavigator on your recommendation specifically with the hopes of running a few of Larry Connors’ screens. as you say the screen is not hard to program with a little head-scratching and trial and error. and it worked, and i went to pay for it to get the live streaming, thinking i could run the screens in the live market. nope. it only lets you run screens after the market has closed. If you want to check at 3:45pm, to make your purchases as the market closes (i trade mainly options, which can’t be done after hours.) it turns out that tradenavigator won’t run a screen with current info as if it’s the end of the day – not even at 3:45pm. you can run a screen for today, after the market closes. this can severely limit your entries, unless you want to buy shares after hours – a bit unpredictable, shall we say?

about a lot of these screens – particularly larry connors’ strategies – the real runners gap up – some higher, some down, but – they all gapped up. pretty frustrating to not be able to get in at the end of the day, let me tell you.

Michael
Michael (@guest_4055880)
1 year ago

hi can u give me specifics on how you set your stop-loss prices? was it a % of the stock amount? if u can give me an actual example i dont know where to put the stops – and i assume you dont do a sell order ahead of time because u dont know the take profit price you just sell when rsi is in the wrong zone? Also did u place market buy and sell orders for the long trades? Also- are these numbers from actual trades or did u get them from testing? And Last ? – do u automate your trades? or did u make each of these trades manually and just use alerts to know when rsi was in the right or wrong level?

Desi Mazdur
Desi Mazdur (@guest_33261)
2 years ago

I have additional question. In this strategy, we will enter into a long position as soon as the RSI is less than 25. We will exit the long position as soon as the RSI is more than 55. Will it be useful if we can continue to be in the long position until the RSI starts going downwards. The reason I say this is because if it is above 55 for several days, then potentially the price is increasing and it may allow us to lock in more profits. In other words, it is kind of simulating a trailing stoploss. The same can be used for entering into a long position where we perhaps do not enter into a trade that they RSI is less than 25 may be wait a day or two and see if it continues to be below 25 and then only enter into the trade. I was thinking about this once I saw some of the trade enter and exit on the technical charts.

Desi Mazdur
Desi Mazdur (@guest_33260)
2 years ago

Thank you for a useful blog post. I reproduced your results in my own in-house setup. How did you choose this list of ETF? The choice of ETF can also make a lot of difference to the outcome and that is why I am asking this question. Also, when you actually deployed this strategy, do you remove the worst performing ETF from the list? I understand you cannot cherry pick but I guess I’ve never understood how to include or exclude an ETF or for that matter, or stock from a given strategy/

guesttrader639
guesttrader639 (@guest_32897)
2 years ago

Emmett, after doing this for awhile do you have a sense about where these guys with their rooms get their subscribers? How and where do they go about their recruitment? I’m shocked at the large amount of interest about trading out there. It’s not as easy as just making a webpage surely.

I put this question here didn’t know where else to place it.

Paul
Paul (@guest_32815)
2 years ago

@Emmett. I work with Glen from TN often. Instead of me or getting one of the TN coders could you send me the scripts for TN, please? Can use my email if you don’t want to post here.

Paul
Paul (@guest_32830)
2 years ago
Reply to  Paul

Sent an email.

Paul
Paul (@guest_32883)
2 years ago
Reply to  Paul

Don’t bother about sending the code for the RSI Strategy. I’ve built it. On the same subject, I realise Emmett you are busy nevertheless it’s not cool to say you will do something and don’t.

Francis
Francis (@guest_32276)
2 years ago

Thank you so much for sharing this ! I litteraly abused this strategy on multiple Forex pairings. Here’s the cumulative result of 4 bots I crafted over the last 2 months based off this strategy. I’m currently adding more and more robot to this curve. The more I add, the more the curve is thightening and it is soooo satisfying !

I hope someday you will give us another gem like this 🙂

Cumul profit.png
Bobby
Bobby (@guest_32559)
2 years ago
Reply to  Francis

Did you use standard lots or micro lots in your test? It is a hard stop of $500 or a 50 pip stop?

Moe
Moe (@guest_32120)
3 years ago

G’day Emmet, your discussion might have brought Larry Connors’ web marketing back to life, as I’ve now started receieving emails from Larry’s Trading Market research, which I haven’t seen for a while. Here is some good refreshing update from him:

Connors Research Traders Journal (Volume 1): Does Mean Reversion Still Work?

Tanner
Tanner (@guest_31796)
3 years ago

This was great, I’ve since purchased this book on the basis of Moore’s review and it’s worth every dollar (paid $49 on a popular online book retailer). Emmett, please do Ezeetrader. I know you are US based but lots of US residents buy Ezeetrader’s courses and they are Not cheap. And have been in their free trial trading room, it seems they don’t want to give up any strategies until you’ve parted with your money.

M Burns
M Burns (@guest_31364)
3 years ago

Hi i went back to 2010 and if you would have bought and held 1000 spy vs this system buy and hold won, Am i missing something ? Please help

Phil
Phil (@guest_31018)
3 years ago

Good article. The info on max drawdown is interesting: about the size of one position, as it happens. This helps decide position sizing a lot. I will implement this strategy bearing this in mind, and also using volatility adjusted position sizing. I will also use a slightly larger and different basket of ETFs, including TLT and a couple of currency ETFs and eliminating the duplications you have (e.g. Latin America and Brazil).

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