A Profitable RSI Mean Reversion Trading Strategy - YouTube

in this video I will be showing you a high win-rate mean reversion RSI

trading strategy and giving you all the information that you need to trade this

strategy today this is Mark from tradinformed.com and welcome to this

video the first part of this video I will be talking about mean reversion

what it is and why we should be trading it in the second part I will be

presenting a trading strategy that you can start using today and in the third

part I will be looking at some of the aspects of this trading strategy and how

we can refine it to suit your personality this video has been inspired

by the work of Larry Conners and Larry has a new book out by the Fear, sell

the Greed and there is a link below this video for more information about that

mean reversion is a factor that is always in the financial markets and it

is there because prices overshoot their value and they do this because

information and the impact of that information, the understanding of that

information filters slowly through the markets and it takes time for the

markets to establish a fair price now this factor is particularly significant

for stock markets for assets when they decline in value because at this time we

have emotions entering the markets traders and investors are now acting on

a fearful emotion and as we know from the works of Daniel Kahneman fear is a

more powerful emotion than greed and what this means for traders is that

prices tend to overshoot to the downside to a greater extent than they overshoot

to the upside this means that there is more inefficiencies and so more

opportunities when fear is in the markets and prices are going down

so in this video I will be using the RSI the normal RSI and I will be using a

short look-back period and you can see on the screen at the moment the backtest

model that I'm using to test this strategy now this is a Tradinformed

backtest model and you can use this to test all sorts of trading strategies and

I will just show you what I'm going to be doing today you can see here I have

the RSI relative strength index I have two EMA's which I'm going to use as a

Golden Cross 50 and 200 period EMA's over here I'm going to be testing the

strategy now if we look on a chart we can see what this trading strategy

looks like I have a short period RSI and I have a long period Golden Cross acting

as my long-term filter and you can see when the RSI is at an extreme value to

the downside we have a potential buying opportunity

now because we are trading this is a long trading strategy we're going to use

the Golden Cross to identify to broadly identify when markets are trading in a

bull market so stocks have been generally moving up we know that fear

tends to be short-lived and we tend to have opportunities so if I go back to

the model you can see the results and you can see the assumptions that I have

started off with here you can see I am using a two period RSI now this may seem

a very small period RSI but as I said this is influenced by the work of Larry

Conners and this has been borne out by the testing that I have done as well so

we have a two period RSI and this number 5 here is our RSI level that we're using

as an entry point the next thing we're using is the RSI as

a close as well so we're using a 75 RSI level as a closing indicator we're also

using a profit target now I want to highlight some of the things in the

results here before I look in any more detail about the settings for the

strategy you can see we haven't got a lot of trades we're using the SPY spyder

etf here and we're using the period from 2000 to the start of 2019 so we've got a

good lot of data here you can see this is what I'm looking for I'm

looking for a high percentage win rate we can't always have a very high

percentage win rate because that often has to causes us to have a lower

profitability but it is nice and it is important to trade a trading strategy

for anybody who's a trader to trade a trading strategy that appeals to you and

that it suits your personality and if your personality suits a high percentage

winning strategy you want to be having time and time again winning trades not

necessarily huge trades but winning trades going into your account this type

of strategy is going to suit you so we've got a very high percentage of

winning trades in this particular set up over time we don't have a huge profit

but we have a good profit factor now the profit factor is gross winning

trades the absolute value of gross winning trades divided by gross losing

trades and if we look down here even more significant we have a relatively

low drawdown if you compare this to what the spy ETF which mirrors the S&P

500 has done over this time period you can see we have a 55% drawdown which of

course occurred during the 2008 2009 financial crisis all these trading

strategies are all these trades rather Are long trades and if you go on to if we

go on to the trades list we can have a look at the sort of trades we're getting

a selection of consistent quite consistent relatively small trades and

an odd few large losing trades so there are a number of things that we can do to

change this strategy one of these is to change our number of days that the trade

is open so you may not want to be exposed to the market for long periods

of time so you can reduce the amount of time the trade is open for so if I'm

going to set it here to just three days you can see we've got a quite different

strategy again we've got a lower profitability

but we've maintained good level a good low level of drawdown the final thing

that I am going to adjust in this video is I'm going to show you what we can do if we

change the number of RSI periods I'm going to just change this from two to

four you can see what this does in particular is reduce the number of

trades so what we need to do if we want to get more trades is to increase this

number here we can increase the RSI entry level you can see we get a quite a

different feel to the trading strategy and if I stretch out the Time Close you

can see we do get a very different type of strategy just using four RSI periods

and a higher level a 30 level of the RSI entry and a 10-day Time Close because

this is all on the top the daily timeframe we have a significant make a

significant change to the structure of the results

we're getting more trades getting a lower percentage of winning trades but we're

holding on to them for a longer period of time and consequently we're getting a

higher net profit I hope you enjoyed this video if you did enjoy this video

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