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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