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Written and copyright © 2010-2011 by Thomas N. Bulkowski. All rights reserved.
This article discusses the results of a system for trading the Welles Wilder relative strength index (RSI) as tested by Active Trader magazine.
Perhaps some version of it would work for your portfolio.
Mechanical RSI Trading System
Each day, I update the test portfolios that appear on the upper right of each page on this website. One of the portfolios, the RSI has a good reputation
of knowing when to buy, but not when to sell and the draw down can be huge.
Active Trader magazine, in their February 2010 issue, discuss an article titled, "RSI scale-out system," by Volker Knapp It's similar to my test portfolio but it scales out of trades.
Here are the rules.
- Long side only.
- Buy at tomorrow's open when the 14 period RSI goes below 30.
- Exit 25% of the position at tomorrow's open each time the 14 period RSI increases by 15 points, namely 45, 60, 75, and 90.
- Set a stop loss for the entire position if price falls below the entry price by 5 times the 20-day average true range (ATR).
- Sell the entire position if it is held 300 days without any sell activity.
For their tests, they used these guidelines on a portfolio of 17 stocks from Nov 1999 to Oct 2009:
- Begin with a $100,000 portfolio
- Allocate 20% per position
- Commissions are $0.01 per share and 0.05% slippage per trade.
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They had 444 trades that made a net profit of $75,904 or 75.9% with a max draw down of 21%. The win/loss ratio was 70% with a 9.2% average profit. The average winning trade made 19.5%
and the average losing trade lost 14.9%.
They mention that no trade hit the 90 RSI reading and say that most exits are time based. My test portfolio rarely hits 80 (4 times in 2 years in over 100 trades). A top end of 75 might
work better as the last exit instead of 90. My feeling is that entering when the RSI is climbing above 30 from below would be a better method than when it's declining below 30. The RSI
can remain below the 30 threshold for months and the stock keeps declining. On the last exit, at 75 or 90 or whatever value you choose, having the RSI dropping down from above tends
to help avoid exiting too soon as price climbs.
-- Thomas Bulkowski
Written and copyright © 2010-2011 by Thomas N. Bulkowski. All rights reserved. It took me 15 years to discover that I had no talent for writing, but I couldn't give up because by that time I was too famous.
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