Even larger edges occur with further pullbacks that occur intraday as people scramble to exit their positions out of self-preservation. These are the trades you want to take advantage of, using the 2-period RSI as a key component of determining when conditions are right.
Before joining The Connors Group in , Joshua worked in online advertising, market research, and financial journalism. The Connors Group, Inc.
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The majority of traders currently calculate the RSI using a day period. More specifically, as the 2-period RSI reaches 10 and below the trading vehicle can confidently be considered oversold. Likewise as it hits 90 and above, it is now firmly overbought. In one-day, two-day, and one-week time frames this has been proven as buyers become increasingly attracted to extremely oversold markets.
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Recently we conducted a study on trading using the 2-period RSI with ETFs and proved once again how powerful this indicator can be in the short-term. We started testing with historical data from the beginning of up through June of this year, looking at every liquid ETF that had an average daily volume of at least , shares per day over the previous 21 trading days.
Over the next 5 trading days we examined how these liquid ETFs performed throughout the entirety of our data set. By breaking down the results into different buckets according to RSI levels in increments of 10, we saw clearly how the top-performing ETFs over the averaged 5-day period had the lowest RSI readings of the entire group.
Incrementally, the performance decreased as the RSI bucket increased towards As we reached the 60 level and above the performance of the 5-day averages became negative returns.