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 [email protected] 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.

 

75 Comments

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