If you cant be profitable with this strategy, you probably shouldn't be trading at all.
“Without data, you're just another person with an opinion.”
― W. Edwards Deming
RSI POWER ZONE
Recently came across a video on YouTube channel StatOasis, where the host shared the 'RSI Power Zone' strategy. This is a mean reversion trading system for the S&P 500, based on Larry Connor's work (RSI2) and the rules are as follows:
Long Only Strategy
1. Buy when RSI (4) crosses below 30 (Open position)
2. Sell when RSI (4) crosses above 55 (Exit positions)
3. No Hard Stops. (Hard stops probably wont work with Mean Reversion type of strategy )
I tested this strategy myself, with data sets from Jan 2012 to April 2022. These are my findings:
> Total profits: $384,325.00
> No. of trades: 121
> Sharpe ratio: 0.33
> Profit factor: 1.43
> Return / DD Ratio: 0.96
> Winning Percentage: 75.21%
> % Drawdown: 76.66%
From the equity curve, we can see that the strategy works very well since Jan 2012, until the huge dip in 2020 (March), due to the worsen pandemic situation in the United States.
Only 2 losing years (excluding 2022 since its only April) for the last 10 years.
Trade durations:
> Mode: 8 days (47 trades) being the most common length of holding a open trade
> Average holding period: 10.8days
P/L growth by duration: generally holding over 12 days ends up with unprofitable trades other than 1 outliers at around 92days.
Average no. of trades per year, excluding 2022: 11.6 trades/year
I knew this should work on S&P, since S&P generally works very well with Mean Reversion type of strategy. It is a swing trading strategy and is not suitable for intraday trading. This strategy, while I have not tested on Forex yet, I doubt it would work over a longer periods, if it worked at all.
Personally I am not too comfortable with the drawdown (DD), hence I tried to play around with the strategy further, to see if I can reduce the % drawdown with some common sense adjustments.
RSI POWER ZONE VER2: REDUCED OVERSOLD LEVEL
In this version 2, I had reduced the RSI Oversold (OS) level from 30 to 20. By lowering the OS level, I am hoping to only get into a position only after a greater retracement and hopefully reduce the drawdown by getting in at a lower price.
Revised Rules
1.Buy when RSI (4) crosses below 20 < New; Reduced from 30> (Open position)
2.Sell when RSI (4) crosses above 55 (Exit positions)
3. No Hard Stops. (Hard stops probably wont work with Mean Reversion type of strategy )
> Total profits: $601,200.00
> No. Of trades: 69
> Sharpe ratio: 0.75
> Profit factor: 2.53
> Return / DD Ratio: 5.82
> Winning Percentage: 78.26%
> Drawdown: 18.75%
The total profits did went up significantly and with a lower DD but the total number of trades dropped from 121 to just 69 trades. With only 69 trades, from a statistical point of view, its probably less reliable. The other parameters such as holding periods, durations etc are similar to version 1, so I wont be sharing abt these.
I personally wont trade this version due to the small sample trading size.
RSI POWER ZONE VER 3: ADDING A TREND FILTER
In this version 3, I added a popular trend filter, 200 SMA, to the original strategy. Basically, I am using the 200SMA to filter out long only trades With this adjustment, I would only take signals with price that closed above 200SMA.
Revised Rules
1.Buy when RSI (4) crosses below 30
2. Price must closed above 200SMA (New)
3.Sell when RSI (4) crosses above 55 (Exit positions)
4. No Hard Stops. (Hard stops probably wont work with Mean Reversion type of strategy )
> Total profits: 589,700.00
> No. of trades: 99
> Sharpe ratio: 0.76
> Profit factor: 2.41
> Return / DD Ratio: 5.45
> Winning Percentage: 78.79%
> Drawdown: 21.1%
The total profits is higher than the original version, with a much lower DD and has 99 trades (less than the original version's 121 trades, but much more than version 2's 69 trades). The 200 SMA filter, has successful filtered some of the most damaging trades (during March 2020). Like version 2, the other parameters such as holding periods, durations etc are similar to version 1, so I wont be sharing abt these.
Overall, if I have to trade one of these 3 versions, I would choose version 3.
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