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Combining RSI Range and RSI Momentum for Stocks

Posted in Momentum Investing, Technical Trading

Some traders use a Relative Strength Index (RSI) range to identify trend and RSI extremes to signal turning points. How long should they require that RSI remain in range, and how often should they require that RSI recapture a momentum threshold? In his December 2018 paper entitled "Finding Consistent Trends with Strong Momentum - RSI for Trend-Following and Momentum Strategies", Arthur Hill systematically tests the predictive power of 14-day RSI range and momentum signals on S&P 500 stocks. Specifically, he tests each of the following five signals over lookback intervals of 25, 50, 75, 100 and 125 trading days:

  1. RSI Bull Range: RSI between 40 and 100.
  2. RSI Bear Range: RSI between 0 and 60.
  3. RSI Bull Momentum: highest high value of RSI greater than 70.
  4. RSI Bear Momentum: lowest low value of RSI less than 30.
  5. RSI Bull Range-Momentum: combination of 1 and 3.

For example, 25-day RSI Bull Range signals buy at the close when 14-day RSI has been between 40 and 100 over the last 25 trading days and sell at the open when it next crosses below 40. His performance metrics are gross Success Rate (frequency of positive/negative returns after buy/sell signals) and gross Profit/Loss Ratio (average gain of successful trades divided by average loss of failed trades). Using daily prices for historical S&P 500 stocks during July 1998 through June 2018, he finds that:

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