RSI(2) vs. DV(2)
The graph above shows the results of two trading strategies applied to the S&P 500 ETF SPY, versus buy & hold in grey, from 2000 to present.
The first (blue) is an extreme RSI(2) strategy that goes long at today’s close if RSI(2) closes below 10, and goes short if closes above 90. The second (red) is an extreme DV(2) strategy that goes long if DV(2) closes below 10, and short above 90.
Geek note: this is a proof of concept so these results are frictionless (i.e. do not account for transaction costs, slippage, or return on cash). Also, I am not purporting that these threshold (10/90) are the best (in fact, they’re very binary which I am an opponent of), but I’m trying to keep things simple and compare apples to apples.
And for the number lovers… note that I’ve also included trading a 50/50% blend of the two as well:
At first glance of the performance graph, it would appear that these strategies are more similar than they actually are. Only about a fourth of the time that at least one triggered did the other trigger. The other three fourths of the time, only one or the other signaled a trade.
This opens up an opportunity I think to analyze divergences between the two, or at least gain some level of diversification of short-term strategies (note reduced average drawdown and improved risk-adjusted returns in table for 50/50% strategy).
First, RSI(2) tends to only work well at extreme readings such as the 10/90 tested here. DV(2) does the same, but also works pretty well at less extreme readings (above or below the midpoint) which we saw in my previous post.
Second, even though both indicators are using similar lookback periods (2 days), they are using very different data sources. RSI(2) relies purely on close-to-close price changes, while DV(2) is looking at the close relative to the day’s trading range. Again, an opportunity to analyze divergences or at least trade in parallel (which, as I talked about in Same Strategy, Different Data, can lead to improved risk-adjusted performance).
Third, I’m not cheerleading for DV(2). It’s an interesting addition to the toolbox, but as I preach incessantly (and recently gave a bit of a negative book review because of), at the end of the day, trading success or failure is driven by much bigger concepts (ex. confidence-based strategies, trading in multiple timeframes, etc.)
[Edit: click for a summary of all posts in this series on the DV(2) indicator]
P.S. A big thank you to David for sharing his work with us and allowing us to pick it apart in a public forum.
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