Alright, now it’s time to see some real results!

Forget the “theories” that you see on other sites. Doing a complete test is the first step to finding out if a strategy actually has an edge.

In the first part of this series, I explained how the RSI indicator works.

Part 2 gave you 3 commonly taught ways to trade the RSI, with complete trading plans. These are methods that can be found on many free websites.

…now it’s time to see what happens when you actually test these ideas.

Do these strategies really have an edge, or are they just trading myths?

Let’s find out…

Before we get started, remember the Trading Heroes Keys to Backtesting Success:

  1. Never trust what you read on the internet about trading strategies. What works for another trader may not work for YOU. So always test strategies for yourself and get hard data.
  2. Always test your trading strategies before risking real money. 
  3. Past performance does not guarantee future results. But successful trading is based on recognizing repeating patterns, so testing is essential to success
  4. If your return with one strategy does not meet your goals, remember that you can add: markets, timeframes, pyramiding and/or more strategies. Don’t give up on a consistent strategy just because the return is low. 
  5. One little tweak in a trading plan can change it from unprofitable to profitable. So test different ideas. 
  6. Trading strategies are easy to learn, but hard to master. You need to put in the work: testing, screen time, journaling and reviewing
  7. Consistently profitable trading is an extremely valuable skill. If you can master trading, there’s always the potential to trade other people’s money (OPM). Don’t give up just because you think that you don’t have enough money. 
  8. Your live trading results may vary from your testing results. Part of the learning process is to figure out why. 
  9. You are 100% responsible for your trading results. These testing results do not guarantee success. 

If you have never backtested, read this blog post.

I tested these strategies with Forex Tester. But you can also use other programs like MT4 or TradingView. They make the testing process longer however.

RSICross Trading Strategy

RSI crossover example

The first strategy that I gave you was the simplest way to trade the RSI. This is the version that I learned way back when I was first learning to trade.

You can get the complete RSICross trading plan here. 

From a logical point of view, this strategy makes a lot of sense.

The RSI indicator detects instances where price is at an extreme…over the last X number of candles.

So it makes sense that you could probably catch a few price reversals that way.

But we’re interested in data and not theories, so let’s get into the numbers…

Backtesting Results

RSI cross strategy

(Screenshot from Forex Tester 4)

Here are the results from this specific trading plan:

  • Currency pair: EURUSD
  • Chart timeframe: Daily
  • Number of days tested: 6,032
  • Number of trades: 102
  • Win rate: 44%
  • Return: -11.38% 
  • Max consecutive winners: 3
  • Max consecutive losses: 5

So if you followed this strategy from some random blog post you found on the internet, my testing shows that you would have lost over 11% over 16 years.

Obviously, it’s good to know that the strategy doesn’t have an edge, before you invest time, energy and money into the strategy.

Thoughts on the RSICross Strategy

This just goes to show that ideas that seem logical don’t always work in trading.

It’s really important that you test and find out for yourself. 

Even though this specific strategy didn’t work, there may be other versions of this strategy could work.

Here are some ideas:

  • One idea would be to increase the lookback period so trades are being taken on more extreme moves.
  • Dropping down to a lower timeframe could also potentially improve results.
  • Targeting a larger profit target can improve the return on some trading strategies.
  • Using some sort of pyramiding technique could help this strategy increase the return per winning trade.

Stay tuned for more RSI tests in the future. 

Alright, now let’s move on…

RSIDive Trading Strategy

RSI divergence signal

The next commonly taught strategy is RSI divergence. I named this strategy the RSIDive, for my own testing purposes.

You can get the complete RSIDive trading plan here. 

I had done some RSI divergence testing before, so I knew that this strategy would probably show positive expectancy.

But you never know until you actually do the test…

Backtesting Results

RSI divergence strategy

(Screenshot from Forex Tester 4)

Here are the results from this specific trading plan:

  • Currency pair: EURUSD
  • Chart timeframe: Daily
  • Number of days tested: 6,032
  • Number of trades: 26
  • Win rate: 73%
  • Return: +12.8% 
  • Max consecutive winners: 7
  • Max consecutive losses: 2

Now we’re talking! 

There are two things that you probably notice about these results.

First, the average monthly return is pretty low. However, remember that this was just one currency pair on one chart timeframe.

You can test more pairs on more timeframes to potentially boost the overall return.

Second, this strategy looks quite reliable.

The win rate is high and it never lost more than 2 trades in a row. That’s fantastic. Now that may not happen exactly in live trading, but the potential is there, based on historical data.

So all-in-all, this is a strategy that is worth testing further. I like this strategy and am currently doing more testing on it.

You can see my full testing results inside the TraderEvo program.

Thoughts on the RSIDive Strategy

Since this is a fairly high win rate strategy, there are things that could possibly be done to increase the return:

  • Add a pyramiding element to the entry
  • Increase the profit target
  • Add a second position to capture the big runs

Keep an eye out for more RSI divergence tests in future blog posts.

If you want to sign up for the email list and be updated on future test results, click the button below. You will also get a free book on how to choose the best trading strategy for your personality.

On to the next RSI trading strategy…

RSI50 Trading Strategy

RSI 50 long trade

The final RSI strategy is a little different.

This strategy uses the RSI 50 level, instead of the 70/30, like most strategies use.

You can get the complete RSI50 trading plan here. 

I’ve never done any testing with this flavor of RSI trading, so I didn’t know what to expect.

It didn’t make logical sense to me, but all that matters is the data.

So let’s get into it…

Backtesting Results

RSI 50 trading strategies

(Screenshot from Forex Tester 4)

Here are the results from this specific trading plan:

  • Currency pair: EURUSD
  • Chart timeframe: Daily
  • Number of days tested: 6,032
  • Number of trades: 55
  • Win rate: 71%
  • Return: +26.05% 
  • Max consecutive winners: 7
  • Max consecutive losses: 3

OK, I was totally not expecting that!

I was almost sure that this strategy would not work.

It just goes to show that you can’t make any judgements about trading strategies until you see some actual data. 

Thoughts on the RSI50 Strategy

Like with the other strategies, this one has a fairly low average return per month.

However, the return can potentially be increased by trading it on more pairs or more timeframes. You can also consider adding a pyramiding element to increase the return per trade.

Even though it was profitable, I’m personally not a huge fan of this strategy. I can see the potential to get whipsawed a lot because you really have to be in tune with the prevailing trend.

So I’m not going to develop this strategy further. 

This is just my own personal preference, at this time. I may choose to work on this strategy in the future. 

It’s a perfect example of not trading every strategy out there. Only develop the ones that work with your trading personality.

If you’re a trend trading personality and want to do more testing, fire up your favorite backtesting software and work on it yourself.

You can also start testing it inside TraderEvo and get feedback on the results.

Conclusion

So two out of the three methods where profitable in backtesting on the EURUSD daily chart.

I wasn’t expecting that.

It goes to show that backtesting is the most efficient way to find out if a strategy has an edge. Imagine if you invested hundreds of hours in a demo account to come to the same conclusion.

Backtesting speeds up the process dramatically. There are limitations to backtesting, however it is the best first step in your trading journey.

I’ll keep on testing and share my results.

But remember…

My results don’t matter. They are simply a starting point for your own exploration.

All that matters are the results that YOU get. After all, you will be the one trading your money…not me.

So take responsibility for your results and start testing for yourself. 

Any constructive thoughts or comments on these results? Leave a comment below…

 

 

 

Disclaimer: Some links on this page are affiliate links. We do make a commission if you purchase through these links, but it does not cost you anything extra and we only promote products and services that we personally use and wholeheartedly believe in. A portion of the proceeds are donated to my charity partners. 



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