Over the course of the next few weeks or so I will be charting the historical performance of buying SPY and other ETFs based on various levels of RSI2 readings.
This first post takes a look at SPY, using a RSI2 level of less than 10 to initiate buys at the close. Each trade is closed at the close 5 days later.
Click the chart to enlarge…
I have created a rolling 10, 20, and 50 trade average and plotted them according to the dates each trade was closed.
On a first glance, it appears that the 10 trade average may be able to be used to time RSI2 trades so that the indicator is used when there is a greater likelihood of it being effective.
While the 10 trade average doesn’t suggest a significant breakdown of RSI2<10 effectiveness on SPY, it does show that performance has increased in volatility. It also shows that there are many times when taking just a few RSI2 trades would result in compounding losses. Again, it may be better to wait for the 10 trade average to fall beneath 0% in order to take higher probability trades. And, as with many mechanical setups, the 10 trade average shows the important of the law of averages. Quitting after a string of losers likely means quitting right before a string of winners.
The 50 trade average does show that the effectiveness has waned over the past 15 years or so.
I will be happy to hear any of your thoughts or questions in the comments section.
I think this is a good place to jump off. There are many variations on this theme. I intend to examine less extreme RSI2 levels and different exit strategies. As I noted in the introduction, I think it is important to run the same tests using QQQ and possibly IWM or other country-specific ETFs.
One final note: MarketSci used to run a fantastic check-up on the effectiveness of mean-reversion. I don’t think he has posted about it this year, but it is worth pulling up the previous posts as his analysis was very interesting.