- STP Algo Trader
- Posts
- STP Algo Trader - The Method
STP Algo Trader - The Method
Vol. 1, Issue 54: RSI Back Testing
Welcome to the latest issue of STP Algo Trader "The Method"!
Every Saturday, we will break down each of the inputs that go into our proprietary algorithmic trading system - Signal Trader Pro.
Not only do we want to share the inner workings of our system, but we want to educate you on how to become a better investor. Remember, our ultimate goal is to help you MAKE MONEY!
We are nearing our completion of the initial overview of the system that drives our algorithmic trading system, Signal Trader Pro.
Next week, we are going to share a single note that reviews each aspect of the system and our “15” point-scoring system.
After that, we are going to begin to describe version 2.0 of the system that we are preparing to launch in early July. We have been testing our results and have developed the next evolution of our process.
The new version will have a new active trading protocol that will help lock in profits and reduce risk. The result is not only to drive our positive hit rate on positions much higher (above 80%) but also to materially reduce drawdowns during periods of market volatility.
Stay tuned to learn more!
Today we are going to discuss one final aspect of our system that we have not discussed – back testing.
Our primary trigger for entering a position is that the stock trades below a relative strength index (“RSI”) level of 30 and then trades back above it.
As a reminder, RSI is a velocity measure that looks how quickly and how far the stock price is moving.
A high RSI (above “70”) indicates that there is very high investor enthusiasm. High levels of enthusiasm are usually constructive in the intermediate terms (two months out or further) but can lead to a stock taking a pause in the near term. A high RSI is a modestly effective “sell” signal but not one we would ever use to short a stock.
By contrast, a weak RSI (below “30”) is a sign of extreme investor pessimism and high levels of fear. As it turns out, investor fear is a stronger – and more powerful – impact on stocks than investor greed.
Going below a 30 RSI and then back above it indicates that the investor fear has begun to subside, and the stock may begin to recover. Again, this is the trigger for our ENTRY SIGNAL.
At Signal Trader Pro, though, we don’t take for granted that this signal is effective for every stock. Empirically it is highly effective for most stocks, but we want to further refine our recommendations to find only the best ideas.
As a result, we look back across the previous twenty-five years of stock trading history or however much data we have on the stock price. Then we see how the stock performed 10 days, 30 days and 90 days after triggering an ENTRY SIGNAL.
Those of you familiar with our successful trading and income strategies HX Trader and HX Income might recognize one of these tables…
This was from a recent report we published in HX Income on Costco Wholesale Corporation (COST).
On the table you can see that COST had triggered an ENTRY SIGNAL, it had generated a profit across all three periods the majority of the time.
Our focus is on the 90-day time frame and here the numbers are strongest with an 83% positive hit rate and double-digit return. These are outstanding results for a high-quality company like COST.
Again, we believe that our RSI ENTRY SIGNAL criteria is a strong indicator of good profits in any situation. Especially with companies that have good operating metrics like those identified by our scoring system.
We don’t, however, just want to take it for granted. We want to make sure that the data backs up our insight.
This is why the RSI back test is a key – and the final – part of our “15” point scoring system.
What did you think of today's newsletter?Your feedback helps us create the best newsletter possible. |