Finding Consistent trends with strong momentum redefines the Relative Strength Index (RSI) as a powerful tool for trend-following and momentum strategies, beyond its traditional reversal role.
“Finding Consistent Trends with Strong Momentum” redefines the Relative Strength Index (RSI) as a powerful tool for trend-following and momentum strategies, beyond its traditional reversal role.
This ebook systematically tests RSI signals on S&P 500 stocks over 20 years (1998-2018). Hill explores RSI’s ability to identify uptrends (above 50) and downtrends (below 50), introducing the RSI Bull Range (40-100) for trend consistency and Bull Momentum (above 70) for strength.
Combining these, the RSI Bull Range-Momentum strategy excels with lookback periods of 75-125 days, achieving success rates above 54% and profit/loss ratios over 2, forecasting sizable advances. Backed by charts, data, and rigorous analysis, this work offers investors a proven, quantifiable approach to harnessing RSI for profitable trend-momentum trading.
Excerpts
Investors and traders typically use the Relative Strength Index (RSI) to identify
turning points in security prices. This strategy, however, discounts the true nature
of the indicator and limits its potential. An RSI breakdown reveals that its power
lies in its ability to identify consistent uptrends with strong momentum. Some
practitioners use RSI ranges to identify existing trends and RSI extremes to signal
momentum shifts.
These approaches, however, do not quantify how long RSI
should hold its range, how regularly RSI should reach a momentum milestone and,
most importantly, if RSI range and momentum indications have predictive value.
The goal of this paper is to systematically test RSI range and momentum signals
using stocks in the S&P 500. Moreover, this paper will show that the RSI range
alone is inadequate because it does not always capture upside momentum. The RSI
range measures trend consistency well, but a momentum component is needed to
uncover the strongest uptrends.
After quantifying and testing, this paper will show
that signals combining RSI range and momentum can foreshadow sizable advances
with good success rates. As such, these signals can be part of a successful investing
strategy that combines trend-following and momentum.