Connors and Alvarez to provide some interesting research to back up their claim. Their testing has revealed that a period of 2 will provide the best returns. Connors and Alvarez set out to test their theory over rsi 2 strategy forex time period from January 1, 1995 through December 31, 2007. They used these numbers as a benchmark for their 2-period RSI indicator to compete against.
Focusing on the oversold side, stocks that had an RSI below 10 were able to outperform each of the three benchmarks. Not surprisingly, when they lowered the oversold requirement to an RSI below 5, the performance numbers improved even more. The numbers then improved again when they lowered the RSI requirement to 2, and once again when they lowered the RSI requirement to 1. When the RSI requirement was lowered all the way down to one, the RSI indicator recorded returns of 0.
This indicates that the lower the RSI, the more the stock was likely to rebound. Clearly, the 2 period RSI indicator can perform extremely well on short term trades. Because of that, I have always been against the concept of an overbought or oversold indicator. Following with my trend following and CANSLIM training, I believe that the stocks with the strongest relative strength are most likely to continue moving higher. What I was missing, was the idea that short term overbought and oversold conditions can exist within long term trends. My CANSLIM and Trend Following background tells me to avoid stocks that are taking big hits and crashing below their 50-day moving average on big volume, but that is a longer-term outlook. It would not be unreasonable for TTWO to bounce back over the next few days and then head further south.
50-day line and has been trending down for the past few weeks. While taking a long term position in this stock might not make much sense to a mid- or long-term trend follower, the stock’s 2-period RSI of 4. 23 indicates that it is likely to see a small bounce over the next few days. They were not picking and choosing their favorite companies.
Therefore, in order for us to use this idea, we will have to build it into a system that will be able to trade every signal generated, not just the ones we like best. This will ensure that we don’t allow our own personal biases to interfere with the system’s success. It is also important to realize that this 2-period RSI concept is simply an entry signal. In order to develop it into a trading system, we will need to add an exit signals, position sizing, and risk management.
This will require extensive testing and analysis, but it does appear that it would be possible to build a profitable short-term trading system using the 2-period RSI as an entry signal. Just wanted to let you know someone is reading. I read about this system four or five years ago, but never used it. I may try it on a smaller scale because it is interesting. I’m glad that you’re finding our systems ideas useful. I used heavily traded stocks that exhibited enough volatility to justify trading them starting in 1999. I appreciate you sharing your general trading setup.
Have you considered taking short signals as well? I would expect that type of strategy to make more than long only. How does the forex market work? What’s happening in the current markets? Digging into the quintessential overbought oversold indicator! Oscillator indicators in general, are risky and unreliable beasts. They might look friendly and approachable at first, only to BITE your hand off just when you are most comfortable!