Does The RSI Give You An Edge? by Larry Connors & Ashton Dorkins
The relative strength index has been heavily used since its
creation, but does it work for you?
The relative strength index (RSI) is one of the most
popular tools used by traders. As such, there are
many books and articles written showing how to
use RSI. Unfortunately, most of the published
material doesn’t show any statistical evidence to support the indicator’s performance. This is surprising, considering
how popular the RSI is and how many traders rely
upon it. Before using any indicator, it is important to test if the
indicator actually works — in other words, does using a
particular indicator give you an edge versus a benchmark,
like an index or the average performance of all stocks?
Our statistical studies helped determine that RSI is indeed
one of the best indicators available — when used correctly.
Most traders use the 14-period RSI, but our studies have shown
that statistically, there is no edge going out that far. However,
when you shorten the time frame, you start seeing some very impressive results. Research shows that the most robust and
consistent results are obtained by using a two-period RSI, and
over the years, we have built successful trading strategies and
systems that incorporate the two-period RSI.
This article is going to teach you a very simple, yet
effective, quantified trading strategy using the two-period
RSI. Before getting into the actual strategy, here’s some
background on the RSI and how to calculate it.