Trading Your Retirement Account With RSI Power Zone

The trading system I'm going to present in this article is based upon a simple idea. This system could be appropriate for traders who trade their 401(k) plans or other retirement accounts, as it can provide them with decent returns while significantly reducing risk compared to buy and hold.

For this to work in a retirement account, I would like the strategy to be long-only, not trade too often and produce a net profit similar to buy and hold with significantly less drawdown.

Can we do it?

Let's find out.

I'm going to start with a trading system called RSI Power Zone. This trading system is inspired by the YouTube channel StatOasis. The strategy is based upon Larry Connors work and the strategy rules should look familiar.

1. Buy when RSI(4) crosses below 30
2. Sell when RSI(4) crosses above 55

Keep in mind, there are no stops and I won't be using stops during this market study.

Baseline Results and Buy And Hold

Let's test this strategy on the SPY ETF market from 2000 to the current date which happens to be March 2022, as I write this. I won't be deducting slippage or commissions. I will dedicate a fixed dollar amount of $50,000 per trade.

The dates tested are from January 1, 2000 to March 30, 2022.

Here are the results.

What about buying and holding? Let's test that. The first trade for our strategy occurs on November 10, 2000. I'll test buying at that price, dedicating $50,000 to buying and holding for the duration of the backtest.

You most certainly can make more money with buy and hold given a lump sum investment. But check out the drawdowns. The buy and hold experienced a drawdown of over 50% from an equity peek (not show). That's a lot!

On the other hand, the baseline system experienced less than a 20% drawdown. If you have a long-time horizon, you can better withstand those drawdowns. But, they can be painful, and people near retirement age will get very uncomfortable sitting through something like that.

So, the advantage to actively trading a strategy like this is you get OK returns with far less drawdown. You also reduce your overall market exposure since you're not always in the market. So, if you're near retirement and don't want to see deep drawdowns, activity trading may be what you want.

But we're not done yet. Let's continue.

Introduce Bull Market Regime Filter

We can further improve the baseline system by reducing drawdown with a simple 200-day simple moving average. This is a simple bull/bear regime filter that often works well on the stock index markets. We'll only take trades when the price is above the filter. 

Big improvement when you consider drawdowns. Our net profit vs. drawdowns rises to a respectable 6.0. Yes, we're sacrificing profit to avoid drawdowns. This of course is a personal choice.

Also, note that we're not reinvesting our profits as we trade. We're just buying $50K worth of shares upon each signal. In the real world, you would most likely include your P&L for your trading capital. Let's do that.

Nice. We have a good improvement over the Baseline, brining us a bit closer to the the Buy & Hold version.

You might be wondering, how robust is this strategy? This is a good question. If we change any of the parameters on this strategy, does the performance hold up?

Let's change the buy and sell threshold to see how it holds up. I tested 100 different combinations of the buy and sell threshold and they were all profitable. Below is a chart depicting the results.

Nearly all combinations are profitable. This is a good sign. Let's now change the RSI look-back period from 2, 4, and 6.

Building A Portfolio

Since we see that many different parameters hold up, we could build a portfolio of RSI Power Zone strategies that trade different parameters. Let's say we have an IRA of $200,000. We could dedicate trading $50,000 per trading system.

Let's pick some values and create four strategies. The strategies below will have a number associated with them that looks like this, 30/55. The first number is the buy threshold, and the second number is the sell threshold.

• Strategy 30/55 - This is our default or baseline parameters used above.
• Strategy 30/85 - Let's do a longer hold from our baseline signal.
• Strategy 50/50 - This was an optimized value based upon TSI.
• Strategy 20/75 - Let's try a deeper pullback with a longer hold.

I used TradeStation to generate the performance report for all four strategies. Each strategy traded was assigned $50,000 in starting capital and used the entire amount to buy shares upon each trade. Profits were reinvested.

I then loaded these four reports in to Portfolio Analyst which allows me to combine the reports into a single report. The following charts were created with Portfolio Analyst. Click on each report for a larger image.

With the portfolio, we are generating a Net Profit vs. Drawdown of 3.8. Our maximum intraday drawdown is $93K, and the close-close drawdown is $36K. Looking at the Annual Returns (above), you can see it's profitable in all years except 2002, 2008, and 2018.

You might be wondering how correlated these four strategies are. Below is the correlation of daily returns and weekly returns. I was surprised to see how low the correlation was. The notable exception is Strategy 30-55 and Strategy 50-50. These two have a solid correlation, and picking different threshold values for these two may reduce the correlation.

Possible Improvements

The obvious option is to build out more strategies by creating more systems with different inputs. You could even change the RSI lookback period. Try using a 2-period, 3-period, or even a 5-period RSI.

Maybe you have a $500,000 account and you can dedicate $50,000 across 10 strategies. Of course, you don't have to trade each strategy with $50,000. Each strategy could trade $100,000 or $25,000. Whatever you wish.

Here is another interesting idea. Could you build a bear market portfolio? As our strategies exist now, it only opens new trades when the price is above the 200-day simple moving average. Why not try trading when the price is below the 200-day simple moving average. We did see this was possible early during the article.

During a bear market, you can make money, but you're likely to experience more drawdown. So, if drawdown scares you, sitting on the sidelines is completely understandable. However, if you're OK with the increased drawdown (maybe you also reduce your trading size) then trading during a bear market can increase your total profit.

During a bear market, you may want to have deeper pullbacks before opening a new trade. Try an RSI threshold of 20 or 10. You may also want to test getting out quickly by setting the sell threshold to 40 or 50. It's worth testing.

In closing, this is an interesting idea that does appear to be viable for trading retirement accounts.

Does it beat buy and hold? It does not look like it if you're looking at net profit. We did not include dividends in this study either, so keep that in mind. However, if drawdown is your concern, the active trading approach may be more your style.