RSI 5 Day Buy and Sell Signal Strategy

Vaughn Okumura, founder of the now defunct vtoreport, outlined the RSI Wilder (5) on his site and stated that it was one of his favorite short-term strategies. He kept a record on the site, and his gains from 2/21/97 through 2/03/06 were in excess of 384%. He achieved these remarkable gains by only trading the underlying QQQQ. The Relative Strength Index (RSI), developed by J. Welles Wilder, Jr. is an overbought/oversold oscillator that compares an entity??s performance to itself over a period of time. It should not be confused with the term "relative strength" which is the comparison of one security's performance to another.

The Trading Rules

"Buy the Nasdaq 100 Trust (QQQQ) when the 5-day Relative Strength Index (RSI) closes below 30.0.

Sell the Nasdaq 100 Trust (QQQQ) when the 5-day Relative Strength Index (RSI) closes above 50.0.

The Nasdaq 100 Trust is purchased during after-hours trading on the day the RSI buy signal is generated. The Nasdaq 100 Trust is sold during after-hours trading on the day the RSI sell signal is generated.

The 5-day RSI strategy has a tendency to underperform the buy-and-hold strategy when the market is strong and outperform when the market is weak. 1997 to 2005 Results: NDX "Buy & Hold"up 76.2%, "5 day RSI" up 349.7% 1997 to 2006 Results: NDX "Buy & Hold"up 108.3%, "5 day RSI" up 381.8%

Model Portfolios

Two model portfolios for NASDAQ 100 are maintained. One uses NASDAQ 100 index ^NDX and the other uses NASDAQ 100 ETF QQQQ. ^NDX has longer history but it does not have dividend. Since QQQQ pays a small dividend and this strategy does not invest in the market for too long, the dividend effect is neglible.

In addition to the NASDAQ 100 model portfolios, a model portfolio using Russell 2000 (small capitalization stocks) index ^RUT is also created. Its poor performance shows that strategies utilizing a short term technical indicator such as RSI-5 is not applicable to every index and one should be very careful while using such a strategy. At best, this should be a very complementary and tactical strategy in one's overall portfolio.

• RSI 5 Strategy Under SMA 200 Days Long Term Indicator intends to avoid blindly get into the market by only taking a stock market position when a long term timing indicator such as SMA 200 Days signals a positive trend.

See Also

• Stockcharts.com, "Relative Strength Index (RSI)"
  
• NDX 5-day RSI Buy Signal Strategy http://www.vtoreport.com/rsi.htm