The Strategic Trader
Detailed Strategy Evaluation

Short

RSI Part 8 – Short Strategies

In previous articles we have identified two methods that provide an edge on the long side (Bullish Hidden Divergence and Buying on oversold conditions). Before reading this article, its recommended you read the following two articles:

1. Buying on “Bullish Hidden Divergence
2. Buying when oversold

For this article we tested the same two concepts to see if they also had an edge when traded from the short side. The first method we looked at was “Bearish Hidden Divergence”. The testing strategy was very similar to the one used in “Bullish Hidden Divergence”. It was immediately apparent that this strategy had a significant edge just like its bullish counterpart.

Several combinations easily exceeded our target values when predicting 3 bars into the future. However, when predicting 5 bars into the future the results were not quite as clear. Several strategies came extremely close, but failed to exceed our targets. In some cases missing by fractions. Because this strategy easily blew past our targets for 3 bars into the future, we know the general concept has an edge. Its likely the edge degrades fast when trading short though. When we explore exit strategies in a future article we will need to take this into account. Here is a screenshot from one of the 3 bar combinations:

Next we tested selling short when RSI crosses above a given threshold (overbought). This strategy also clearly contains a statistical edge. Many combinations for both 3 and 5 bars into the future were profitable. Here is an example of one such combination:

The next step will be to create a “combination” strategy using several parameter combinations each exhibiting a statistical edge to see if the combined edge is maintained.

Source Code:

Download Divergence Source


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