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 an excellent daily price graph demonstrating where exit signals generated for QQQ. Naturally, I would like to test sRSI to see if it has an advantage over some of my other exit techniques. So, lets put it to the test.
Testing The Buy/Sell Signals on Stock Indexes
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.
Strategy Rules:
Based upon the charts in the article, buy/sell signals are generated when the sRSI calculation moves away from the centerline (yellow), which has a value of zero. The indicator code provided by the author defines a .05 buffer around the centerline. 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.
- Buy when the sRSI values rise above .05
- Sellshort when the sRSI value falls below -.05
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.
@ES
@NQ
@YM
@EMD
The indicator does OK on most of the indexes but not so great on @YM. I also noticed it was the short side that consistently lost money. This is not too surprising as shoring the stock index futures is more challenging 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.
Testing Exit Signal on Stock Indexes
The title of this new indicator is "Sell RSI" so, let's use the signals from this indicator as a sell trigger.
In a previous article, I tested different exit methods of the Largurre RSI trading model, which does a fantastic job on the stock index markets. The Largurre RSI nails entry points, and the sRSI is supposed to do well on the exit. So let's 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.
Testing Environment
Before getting into the details of the results, below are the testing assumptions used.
- Starting account size of $100,000
- In-sample dates are from 1998 through November 30, 2016
- Commissions & Slippage not deducted
- One contract traded per signal
- Markets traded: ES
So, I coded the new sRSI exit and tested it with our Largurre RSI trading model. Below is a table that features the results for each of the different exits. Our new sRSI is the item tested, Type 6.
Type 1 | Type 2 | Type 3 | Type 4 | Type 5 | Type 6 | |
|---|---|---|---|---|---|---|
Net Profit | $71,275 | $24,888 | ($27,275) | $71,775 | $85,625 | $34,550 |
Profit Factor | 1.82 | 1.23 | 0.80 | 1.67 | 2.39 | 1.42 |
Total Trades | 119 | 118 | 119 | 118 | 183 | 107 |
%Winners | 72% | 62% | 38% | 72% | 77% | 38% |
Avg.Trade Net Profit | $598.95 | $210.91 | ($229.20) | $608.26 | $467.90 | $322.90 |
Return on Capital | 71% | 25% | (27%) | 72% | 85% | 85% |
Max Drawdown | $34,348 | $62,475 | $43,400 | $41,838 | $17,925 | $38,950 |
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 stopped testing it for the stock index futures as it does not appear to hold much value. Of course, I may be misusing it, 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 promising.
Sell RSI On Other Common Markets
Let's look at a few other markets. Let try gold, oil, U.S. bonds, Soybeans, and the euro. In this test, I'm 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.
@GC
@CL
@S
@US
@EC
Conclusion
The Sell RSI indicator does not seem to hold much promise from the stock index futures. However, the @EC (Euro Futures) and @S (Soybeans) may hold some promise 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.