In the February 2019 issue of Technical Analysis of Stock & Commodities appeared an article called, “Sell Relative Strength Index” by Howard Wang. He proposed a modified RSI indicator. He calls it the Sell RSI or sRSI for short.
This indicator is attempting to quantify the strength of sell-offs vs the size of accumulated profit. The idea is to generate a more timely exit than a standard RSI. Within the article, there is a nice daily price graph demonstrating where exit signals would have been generated for QQQ. Naturally, I would like to test sRSI to see if has an advantage over some of my other exit techniques. So, lets put it to the test.
First I created a simple EasyLanguage strategy to test the buy and sell-short signals generated by this indicator. While the article implies this indicator is for generating sell signals, the author did highlight buy signals as well. So, let's measure how well both buy and sell-short signals do on some of the markets I like to trade.
Based upon the charts in the article buy/sell signals are generated when the sRSI calculation move away from the center line (yellow) which has a value of zero. The indicator code provided by the author defines a .05 buffer around the center line. If the sRSI value is >= .05 the indicator is colored green. If the sRSI value is <= -.05 the indicator is colored red. Otherwise, the indicator is colored yellow.
Based on this, I’ve created the following Long/Short rules.
There is only one input parameter, the length of the lookback period, and I used a value of 20. Below are the equity curves for @ES, @NQ, @YM and @EMD on a daily chart.
The indicator does OK on most of the indexes but not so great on @YM. I also noticed it was the short side which consistently lost money. This is not too surprising as shoring the stock index futures is more difficult to do. The long bias in the index markets over the decades makes trading on the long side a bit easier. Maybe a lot easier!
Overall, not too impressive.
The title of this new indicator is "Sell RSI" so, let's just use the signals from this indicator as a sell trigger.
In previous article I tested different exit mthods of the Largurre RSI trading model which does a fantastic job on the stock index markets. The Largurre RSI really nails entry points and the sRSI is supposed to do well on the exit. So lets test it. Before we do you may want to review the previous article, Testing Laguerre RSI Entry and Exits, and the different exits we tested.
Before getting into the details of the results, below are the testing assumptions used.
So, I coded the new sRSI exit and tested with our Largurre RSI trading model. Below is a table which features the results for each of the different exits. Our new sRSI is the item tested, Type 6.
Avg.Trade Net Profit
Return on Capital
As an exit indicator the sRSI does really poor. Type 5 is a simple moving average exit which produces the best results.
At this point I stoped testing it for the stock index futures as it does not appear to hold much value. Of course, I may be using it incorrectly or it may do well with other markets and trading styles. However for me, the sRSI as an entry or exit trigger does not look promosing.
Let's look at it on a few other markets. Let try gold, oil, U.S. bonds, Soybeans, and the euro. In this test I will be simply going long with a buy signal and shorting on the sell signal. Thus, this is a stop-and-reverse type test.
Below are the equity curve charts.
The Sell RSI indcaotr does not seem to hold much promoise from the stock index futures. However, the @EC (Euro Futures) and @S (Soybeans) may hold some promoise and may be worth exploring further. Again, this is using the default value of 20 for the lookback on the sRSI indicator for this test.
Jeff is the founder of EasyLanguage Mastery - a website and mission to empowering the EasyLanguage trader with the proper knowledge and tools to become a profitable trader. Join our EasyLanguage FaceBook group to interact with other EasyLanguage traders! Click the FaceBook icon to join.
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