INDICATORS  |  NOV 2007

Does The RSI Give You An Edge? by Larry Connors & Ashton Dorkins

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.

by Larry Connors and Ashton Dorkins