A few days ago Michael Stokes at **MarketSci** made an excellent post concerning RSI(2) readings, the changing frequency of extreme readings, its (the RSI’s) quality of forecast and efficiency of trading short-term mean-reversion in the markets over the course of time since 1950 (**Extreme RSI(2) Readings Becoming Less Common**, and he already covered the topic **here** and **here**), and based on his findings and conclusions -for exemplary purposes- I set up a static trading strategy (static means no adjustments of RSI time frame and break points) for the time frame since 1993 (SPY, see **Trading the RSI as a Static Strategy**) which would not only have been profitable over the course of time but would have been outperformed the index as well (and on top of that with a lesser maximum month-end drawdown).

But what would Michael’s finding that extreme RSI(2) readings currently become less common than in the past mean percentage-wise concerning a potential RSI(2) strategy ?

I conducted the same analysis for the time frames from 1950 until 1970, 1970 until 1990 and 1990 until 2009 for the S&P 500 with a 2-day RSI as I did for the static trading strategy with an RSI (2.5) for the SPY, meaning I determined the distribution of gains and losses on those sessions (the first and second day thereafter) immediately following a session when the S&P 500 RSI(2) closed between a lower and upper break point in order to evaluate an ideal exit point for a potential RSI(2) strategy (where the sum of all gains minus the sum of all profits = expectancy turns from positive to negative, which means -on average- the maximum possible gain on the upside would have been achieved).

For the three different time frames from 1950 to 1970, 1970 to 1990 and 1990 to 2009 , the following tables **Table I **to** Table III** show the respective distribution of profits and losses for the **S&P 500** and the **RSI(2)** over the course of the then following **2** sessions, broken down by different ranges (potential upper breaking points) for the RSI (2), assumed one would’ve bought the S&P 500 on close of every session when the RSI (2) closed anywhere between the lower and the upper break point (no overlapping trades allowed). Please take a special look at the third last row (‘Profitability’).

**Table I (1950 – 1970)
**

Regarding the time frame from 1950 until 1970

- all RSI(2) readings above 70 led -over the course of the then following two sessions- on total to profitable trades if one would have bought the S&P 500 on close of a session with an RSI(2) reading between the lower and upper break point,
- all RSI(2) readings above 70 show positive win/loss ratio, profitability and profit factor significantly above the at-any-time profit factor for the time frame from 1950 until 1970, and
- there were significantly more extreme RSI(2) readings between 90 and 100 than between 70 and 90 combined (the sum off all occurrences between 70 and 90),
- and RSI(2) readings between 90 and 100 show the highest profitability of all RSI(2) ranges.

So any RSI(2) strategy build upon a potential short on any RSI(2) reading above 90 would have been a clear receipt for disaster, and the upper break point would had to been set close to 100 in order to achieve maximum gains on the upside.

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**Table II (1970 – 1990)
**

Regarding the time frame from 1970 until 1990

- all RSI(2) readings above 70 led -over the course of the then following two sessions- on total to profitable trades if one would have bought the S&P 500 on close of a session with an RSI(2) reading between the lower and upper break point,
- all RSI(2) readings above 70 show positive win/loss ratio, profitability and a profit factor either slightly, partly significantly above the at-any-time profit factor for the time frame from 1970 until 1990, and
- the amount of extreme RSI(2) readings between 90 and 100 approximately equals the total amount of RSI(2) readings between 70 and 90 combined (the sum off all occurrences between 70 and 90),
- and RSI(2) readings between 80 and 90 show the highest profitability of all RSI(2) ranges.

So any RSI(2) strategy build upon a potential short on any RSI(2) reading above 90 would have been still a clear receipt for disaster, and the upper break point would had to been set close to **90** in order to achieve maximum gains on the upside.

But profitability and total amount of extreme RSI(2) were less extreme than the respective figures concerning the time frame from 1950 until 1970.

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**Table III (1990 – 2009)**

Regarding the time frame from 1990 until 2009

- only RSI(2) readings between 75 and 80 led -over the course of the then following two sessions- on total to profitable trades if one would have bought the S&P 500 on close of a session with an RSI(2) reading between the lower and upper break point,
- only RSI(2) readings below 80 show positive win/loss ratios and a profit factor close to the at-any-time profit factor for the time frame from 1900 until 2009, and
- the amount of extreme RSI(2) readings between 90 and 100 approximately equals
**half**of the total amount of RSI(2) readings between 70 and 90 combined (the sum off all occurrences between 70 and 90).

So any RSI(2) strategy build upon a potential short on any RSI(2) reading above 90 could have been profitable for the first time since 1950, and the upper break point would had to been set somewhere between **70** and **80** in order to achieve maximum gains on the upside

So I completely agree with Michaels bottom line (cit.) ‘… *the markets are becoming more contrarian in the short-term. That means the market tends not to move in a single direction for as long, which means that the market tends to register less extreme readings on short-term indicators such as this one**.*‘

Successful trading,

**Frank**

P.s.: WordPress recently implemented a Twitter widget, so I’ll regularly make some intraday updates as well using Twitter (as I already did during the last couple of session, but unfortunately there seems to be a connectivity issue between WordPress and Twitter; hope that will be solved soon). If you’re interested in, please have a look at the blog during the trading session as well or subscribe directly to Twitter.

Filed under: Studies/Survey, Trading Strategies