Home MarketsOptions RSI Backtest: Predicting the Stock Movement Using RSI – Part 1.

RSI Backtest: Predicting the Stock Movement Using RSI – Part 1.

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Option Samurai Option Scanner Designed to help you find the best options trades on the market. To do that, we collect a lot of data points from different sources so that we can leverage different edges in the market. This makes trading more robust as you can find different trades that work in different market regimes. It is often useful to backtest specific data points and deals to validate the data you add and maximize your advantage. We have a series on implied volatility edge and backtesting, you can read the first part here.

This is the first in a series of backtests testing various technical indicators to help you get the most out of our technical analysis engine.

In this part, we will use the table backtesting framework and the RSI indicator.

The Relative Strength Index is one of the most popular technical indicators. It is designed to compare the current strength of an asset to its historical value.Click here for details our knowledge baseUse it as a contrarian indicator for mean-reverting trades. That is, if it is extremely low, it goes long, and if it is extremely high, it goes short.

The table backtesting framework is a backtesting framework we invented that tests the average change in an asset after an event. The backtesting of the table is designed to allow you to see at a glance the variations of this event and the effect on change. For example:

The right row shows the various thresholds for the event: 90+, 80+, 70+, etc.

Columns show average changes after X days: 5 days (1 week), 10 days (2 weeks), 15 days (3 weeks), and 20 days (approximately 1 month).

The cell itself shows the average change in assets for normal shifts. This means that if you look at 1% in that scenario, the asset will move 1% more than normal on average.

For example, in this table we can see that SPY moved an average of 2.67% more than usual after the RSI crossed 20.

SPY – RSI Backtest 2016 – June 2022

The advantage of this backtesting is that you can see at a glance the various thresholds and events and how they affect the change under test.

Before checking backtest results – It is important to remember that technical analysis seeks to understand the supply and demand of an asset via price action, indicators, etc. This is why understanding how the market works is essential. For example, an asset behaves a certain way when you’re in a bull market and different when you’re in a panic. The following analysis will elaborate on this.

[Update for 2022 and the recent bear market]

The table below shows the changes in the underlying ETF after the 14-day RSI hits the thresholds in the left column. Data is from 2016 to June 2022 and includes the COVID crash, Covid rush and recent bear market.

SPY – RSI Backtest 2016 - June 2022
SPY – RSI Backtest 2016 – June 2022
QQQ – RSI Backtest 2016 - June 2022
QQQ – RSI Backtest 2016 – June 2022
IWM – RSI Backtest 2016 - June 2022
IWM – RSI Backtest 2016 – June 2022

If you remember the IV backtests you performed, you’ll see that the results here aren’t as “clear” as they were for the IV. However, we can see essential and clear insights from these backtests.

  1. Average return – You can see that the index exhibits mean-reverting behavior. The more extreme the movement in one direction, the more likely it is to move in the opposite direction. However, we can see that QQQ exhibits more consistent behavior.
  2. Move slow – The RSI14 indicator is relatively slow compared to other mean return indicators. This means there are less extreme readings, but when the RSI hits a very bearish level, it’s usually a longer term (3-4 weeks) as there is a massive outflow of money from the market. is a bearish sign.

Here’s how the table changes when compared to the past (mainly bull markets):

Before I go into the detailed insights, I would like to show the results of the backtesting with 2020 excluded. The results below are from 2015 to December 2019. 2020 None:

RSI Backtest without 2020 (2015-2019)
RSI Backtest without 2020 (2015-2019)

Looking at old backtests, we can see that RSI14 was much better at signaling past revision points. Especially when you look at small caps (IWM). However, the extreme case of the COVID crash, followed by currency printing and risk-taking, changed the mechanics of the market and made the RSI 14 less accurate (but still worth it).

What you can do now:

  1. When using the RSI 14, it should be integrated with other indicators (fundamental, sentiment, etc.).
  2. Use different time intervals for RSI.
  3. Use another mean return metric.

If you think the 2020-2021 event was an extreme “outlier year”, you can continue to track the RSI14 as a mean-reverting indicator. This is a widely popular and accepted metric, so (I believe) it may become important again in the future.

Usage in trading

get a new job – You can use the RSI indicator (and technical analysis) to enter new positions (with support signals). For example, if you are bullish, you can enter a trade with the RSI below 20/30.

delay entry into new positions – If the RSI is high (above 70), it is usually better to wait without entering a new position.

Find deals – You can use the RSI filter to find trades to invest in. For example, if you’re bullish, you can set the threshold below 20 or 30, delay it by a day or two, and see if it continues to drop. You can also use Samurai’s Monitoring service and be notified when there are new trades.

close the deal – Samurai’s monitoring feature can be used to notify you when the stocks you follow reach overbought/oversold so you can add a trailing stop loss or exit your position. increase.

If you’re bearish, set a time delay by setting it to 80 and you’re more likely to go back.

You can use predefined scans (sell OTM puts that are likely to profit on oversold stocks). Stocktwits account.


The RSI is a technical indicator that can be used to initiate average correction trades when extreme thresholds are crossed. found to be essential.

When the RSI breaks below 20, it is considered a bullish signal. Any RSI above 80 is considered a bearish signal. If you want to be more aggressive and see signals from other indicators, you can change the threshold to 30 and 70.

Future articles will explore technical indicators in more detail using different assets (such as commodities) and more trading frameworks.

  1. A webinar presented on how to trade overextended stocks.
  2. Our Technical Analysis Engine knowledge base
  3. Sell ​​oversold OTM puts (with option Samurai)
  4. Details about Knowledge Base RSI Indicator
  5. A study of the implied volatility of options.

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