The Strategic Trader
Detailed Strategy Evaluation

RSI Part 5 – Optimized Thresholds

In this article I want to explore which threshold values are the most significant (long only) and also see what happens when applied to other markets. To test this, I optimized the strategy on both threshold and RSI period while counting the number of times the resulting combination exceeded our statistically significant levels for both percent profitable and net profit.

Results for 5 Bars Into Future:

First I looked at the various threshold values and how often when using the threshold I was able to surpass either our target percent profitable or target profit levels. Threshold values of 25 and 30 seemed to be the most robust.

Threshold Count Beat Percent Count Beat Profit
10 0 0
15 1 0
20 3 1
25 3 2
30 2 3
35 2 0
40 4 0
45 6 0

Each of the above threshold values were used against various RSI periods ranging from 2-30. Below is a table outlining which periods resulted in surpassing our targets. Interestingly the lower periods 2-5 performed the best. I believe this may have something to do with our target holding time. Since we are only looking 5 bars into the future, the smaller RSI periods reflect the upcoming moves more accurately.

RSI Period Count Percent Count Profit
2 2 2
3 4 1
4 3 2
5 1 2
6 1 2
7 0 1
8 0 1
9 0 1
10 0 1
19 0 2
30 0 1

The combination of RSI(3) < 30 was the only pair to result in both a beat on percent profitable as well as target profit level. I wanted to see how robust this pair actually was, so I ran it against all 30 of the DOW stocks. The method was profitable on 25 of the 30 stocks. With PG performing the best, and CAT performing the worst. Over 436 thousand trades were recorded during this test, resulting in 54.2% profitable trades.

The strategy was able to beat the target percent in 17 of the 30 stocks, and beat the target profit in 7 of the 30 stocks. Considering the period/threshold combination was optimized on a different market, I believe these results are very promising.

Next I wanted to see what happens if I flip the combination and entered long when RSI(3) > 70. The results were horrible as expected. Further lending support to their being an edge when below a threshold as opposed to above a threshold. Only 6 of the DOW 30 was profitable in this test. With a combined 50.06% profitable trades.

Results for 3 Bars Into Future:

The same methods used for 5 bars into the future were used for 3 bars. Here are the two resulting tables:

Threshold Count Beat Percent Count Beat Profit
10 3 1
15 7 2
20 7 1
25 11 0
30 12 3
35 24 4
40 23 0
45 12 0

The results stayed similar to what we saw with 5 bars. Thresholds between 25-35 do very well. One thing to note is using 3 bars into the future we are having a lot more values beat our targets. This may indicate predicting 3 bars into the future is easier than 5 when using RSI.

RSI Period Count Percent Count Profit
2 11 1
3 11 1
4 9 1
5 6 1
6 5 0
7 2 1

I had way too many RSI periods beat our targets. Therefore, I am displaying only the top performers. The lower periods seem to predict better than the higher periods for this time frame.

Summary:

It looks like any threshold between 25-35 is ideal with a period less than 5. I would like to point out that while I am only showing the count that beat our targets that this does not mean the other combinations did not fare well. In fact, combinations in the ranges I outline were uniformly great. We have  strict requirements in the targets we are after. This is to ensure the results produced are not due to random chance. Its hard to go wrong when predicting either 3 or 5 bars into the future using a threshold of < 40.

The RSI(3) < 30 combination performing as well as it did against the DOW 30 stocks is very reassuring.


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