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:
- The ETF is above its 200-day moving average.
- The 4-period RSI closes under 25. Buy on the close.
- 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:
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:
- The ETF is below its 200-day moving average.
- The 4-period RSI closes above 75. Sell Short on the close.
- 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:
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.’
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.
- Stop buying expensive and useless indicators.
- Stop listening to trading Guru’s and day trading charlatans.
- Invest your time and energy into learning how to program and test trading strategies.
- 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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67 Comments on "High Probability ETF Trading: RSI Trading Strategy"
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 🙂
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: http://tradingmarkets.com/recent/does-mean-reversion-still-work-1593757.html
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.
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
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).
Read this article the other day, thought this may be of interest to some of you, as it shows some profitable algos with backtested results.
https://hackernoon.com/hacking-8-algos-161d1f28dcf3
Oh thats a great article. I can backtest that easily. Thanks for the link. Am always desperate for good material.
Just thought I would throw in another link of someone testing Conner’s RSI strategy. Again if you try enough combinations some will work. So you can now insult this person also.
http://systemtradersuccess.com/connors-2-period-rsi-update-2014/
Again showing proof of your profitability trading this strategy over an 8 year period will be powerful evidence. I cannot wait to see it.
When I test a strategy, I look for a “best neighborhoods.”
In other words, if the RSI strategy works with a 75/25, then it should also work with a 70/20, 65/15, etc.
If I the entire neighborhood of variables looks good, then we have something.
I recommend that readers test this stuff themselves and look at the neighborhood.
Exactly.
You have some serious anger issues. I’d guess that being a failed trader for many years is probably a big part of it. I’ve clearly shown I’m the one who understands the difference between backtesting/live trading and other industry standards (parameter sensitivity, realistic expectations of drawdowns, etc.).
I wish you the best….and go get professional help if you need it…sounds like you might.
When someone posts a comment that I do not agree with, I simply ignore it.
Though I love when everyone is civil, it’s just not possible. Nor can it be expected.
Rather than spike our blood pressure, its better to laugh at off-handed comments.
Regarding trading systems strategy…in particular, the Connor ETF strategies, obviously, I love it. But I don’t take it personally when others disagree. Rob is great at pushing buttons, and that’s OK. If I don’t agree, I just read a different comment.
“Rob is great at pushing buttons, ”
Or as the younger generation says, making people get “triggered.” Good advice, BTW. Thanks.
Yes Mkt I do not mindless go along with group think. I actual think for myself and that means sometimes I disagree with even Emmett. And in this case certainly disagree with you and you unsubstantiated claims and wild accusations.
I really appreciate your comments Rob. They make a lot of sense. When testing strategies it seems an almost unconscious temptation to cherry pick and not even realize it.
Actually I was quite civil until you started to post any insults you could just like above. You claim to have traded the RSI strategy for 8 years and yet refuse to show any evidence of your claim. Instead you deflect by just making wild accusations.
And as for you other statement you have not show anything and clearly have no understanding that backtesting does not equal live real money forward testing.
Hey Mkt – My advice is to ignore the irrelevant troll Rob B. As you can see, when he does not have a leg to stand on, he starts hurling insults, calling you delusional, etc. Everyone else is wrong, except him. A psychologist would find him an excellent case study for the DSM. Most of us who have been here for a while have learnt to just ignore him. You simply cannot win an argument with a troll such as he.
Thanks, dtchum. His last post was a great example. He’s grasping for straws, trying to show that it may occasionally be hard to implement this strategy. In reality, this barely ever happens, and there are several workarounds. However, it’s easier to make excuses and say something doesn’t work–than admit you’re wrong.
I guess he can simply rely on buy-and-hope…great timing since most valuations are at or near record highs. The non-stop bull market since 2009 won’t continue forever, and traders will soon have the edge again–at least those who use disciplined, tested strategies.
What a shocker the long term troll DTCHUM once again shows up.
So predictable. Not a single bit of useful information about the topic or about using the RSI. I doubt you even read the thread, know what I have been debating about or have any clue about the RSI. Just any opportunity to take cheap shots at me about a topic you have no clue about.
Man, you are truly the text book case of a useless troll.
I haven’t been to the site lately, but saw one comment here. I see little Robby B has been fiddling around with the votes again…It’s pretty sad that a grown man is that worried about other people’s approval. Grow up, dude.
“I have already explained why most folks will not be able to hold during draw downs when blindly trading an indicator.”
That’s simply your opinion, but study after study has shown that investors abandon buy-and-hold near market lows. So it’s no panacea either.
Touché, snowflake.
We finally agree on something, investing is not easy. If you had been as honest about your RSI trading strategy we might have gotten off to a better start.
BTW, when you only support is long term troll DTCHUM you know you are in trouble.
“We have to have some ground basis to have an intelligent discussion. You have to understand basic statistics”
Projection much? You’re the one who continues to confuse backtesting and real-time walk forward testing…and still doesn’t understand parameter analysis. How about doing a bit of research before shotgun posting like an angry 13-year old.
https://www.quantconnect.com/forum/discussion/1249/do-you-trust-your-backtest–what-is-system-parameter-permutation-and-is-it-a-better-way
“As far as Black-Scholes you are clearly too dumb to even understand the model and what happened. You clearly missed the whole point of systems that cannot fail. ”
For the umpteenth time, Black-Scholes is a PRICING model. It’s not a trading system. You can use it within a trading system and it may or may not give accurate pricing. And yes, one of LTCM’s founders helped create Black-Scholes. But it didn’t fail, the strategy used by LTCM did. Here’s a recap from an options/hedging expert, and he nowhere says that BS “failed”:
https://seekingalpha.com/article/3618296-lessons-long-term-capital-management
I believe CANSLIM uses fundamentals? Now that would be fun to test.
Hi Emmett, It has been done see link in my previous post.
AAII publishes results of numerous trading strategy like CANSLIM, they even have a modified CANSLIM. I use to trade the Martin Zweig one.
Zweig, huh?
“Rob B, losing money, switching systems and getting irritated at more successful traders since the 1980s” There’s a tagline for you!
“Mkt, You are just being willfully stupid at this point and clearly making up alias to vote me down”
I did it as a joke after noticing the quirk and seeing you do it multiple times already. I can honestly care less about “likes” and affirmation, but it sure means a lot to you. That projection thing again, Robby…
Mike,
Indeed. Even if you had an indicator trading strategy that worked when forward testing with real money, it can be very difficult for one to trade. Every strategy goes through draw downs. And when you are losing money trading based on an indicator and nothing else, will ones belief in the strategy hold out? How about if the draw down last for years?
In the fantasytradingroom dot com, we never have drawdowns. What the hell are you smoking. 🙂
Coming soon, just as I said before.
“Now back test and say 20% outperform. You forgot about the 80% that underperform and write an article or a book, “Look at these 400 amazing strategies that outperformed”. ”
Good system traders like Connors and Alvarez understand this and that’s why they do parameter sensitivity tests and other measures. If a 75/25 RSI system is profitable but 76/24 or 77/23 versions aren’t, you throw out your results. You clearly haven’t studied the literature in this area.
can u guys stfup i m trying to read new informartion not this bs.. both of u guys are dump.. now next please..
Hi Emmett
Interesting! But you should consider to add some sort of room for slippage and comissions!
All 20 symbols have deep, deep liquidity. Slip isn’t a big concern with this portfolio.
Hi Emmet. Thanks for the article. Have u tested the strategy with real live results? If so how do they match up to back tested results? How would commissions factor in to results? I love your site! Keep up the great work!
Hi Joe,
The strategy was published in 2009, so we have 7 years out-of-sample. Whats great is that the out-of-sample results are actually better than the sample results. In other words, 7 years of blind results have proven the strategy is very robust.
Commissions are tricky on this strategy because I calculated $2k per trade. So if the share price is $100 per share, then we are talking only 20 shares. As a good reference point, I simply deducted a $1 per trade.
If you are clever and want zero commissions, then opt for Robinhood, which is free trading.
This particular strategy was originally published in 2009, by simply looking at the equity curve from 2009-2017 we can see out-of-sample performance has actually improved. No big mystery to solve. As well as the average trade size has increased, as well as numerous metrics that confirm.
I see–well that’s good to know. It may be some of their other strategies that didn’t perform as well going forward. They’re still profitable, though. Most of their strategies are very similar, whether they use short-term RSI, 7 day high/lows, etc.
I think such strategies will have good longevity, because they meet several criteria:
1) Not overly complex or curve-fit
2) Trade in the direction of the long-term trend (200-day MA). Always trade with the wind at your back.
3) In the short term, go counter-trend and “buy fear and sell greed” (or vice versa).
Emmett, how are the fills of Robinhood vrs others like IB. Have heard many times and especially for wall street “there is no free lunch out there”. For a person taking 3 trades a day Robinhood can mean good $500 savings each month, which is substantial.