70-30 RSI Trading Strategy: Does It Still Work?
Many traders turn to technical indicators like the Relative Strength Index (RSI) in the hope of finding consistent and objective ways to enter and exit the market. One of the more common approaches is the so-called 70-30 RSI strategy, where traders look to buy when the RSI dips below 30 (indicating oversold conditions) and potentially sell when it rises above 70 (suggesting overbought territory).
This kind of strategy sounds appealing in theory and is often used in textbooks—it promises to buy weakness and potentially exit near strength. But how reliable is it in practice?
Conclusion First: Not Very Reliable
Based on our backtest of this strategy on the S&P 500 from 1993 until today, the 70-30 RSI strategy with a 5-day lookback is not particularly reliable or profitable.
It generated only 191 trades over more than 30 years, and the average gain per trade was 1%. More importantly, the strategy was marred by large drawdowns, some of which exceeded -30%, making it psychologically and financially difficult to stick with.
Even before accounting for transaction costs, slippage, or taxes, the numbers are underwhelming. Once those real-world frictions are included, the strategy likely performs worse than simply holding the index long-term.
RSI 70-30 Backtest
We backtested the following trading rules:
- When the 5-day RSI crossed below 30, we go long.
- When the 5-day RSI crosses above 70, we sell.
The equity curve for the S&P 500 from 1993 until today looks like this:
The number of trades was only 191, and the average gain was just above 1%. We can see that the drawdowns are pretty long, and the biggest one was 39%.
We improved the 70-30 RSI strategy.
Why the Strategy Struggles
There are a few reasons why this RSI setup delivers poor results.
First, a 5-day RSI might be too long. It’s better to react to small pullbacks because stocks are mean-reversionary.
Second, the strategy waits for the RSI to climb all the way to 70 before exiting, which often results in giving back gains. This rigid exit condition misses many profitable bounces that don’t reach that level.
The results improve if you use a shorter lookback period, such as 2 or 3 days, and a lower entry threshold. If you add the QS exit it improves a lot.
Can It Be Improved?
While the base version of the 70-30 strategy is unreliable, that doesn’t mean RSI is useless, far from it.
The indicator is still very useful, also when used in combination with other filters or risk management tools.
For instance, adding a long-term moving average filter (like the 200-day SMA) can help align trades with the broader trend. Using a longer RSI period, or incorporating dynamic thresholds that adjust based on volatility or market regime, can also improve results.
Furthermore, adjusting the exit logic—such as using a time stop or a short-term moving average crossover—can help reduce the average holding time and capture profits more efficiently.
Final Thoughts
RSI-based strategies, particularly those built on fixed thresholds like 70 and 30, need more than just oversold/overbought logic to succeed. While the 70-30 RSI strategy may sound intuitive, our backtest results suggest it lacks robustness, reliability, and consistency when applied mechanically on the S&P 500 with a 5-day lookback.
For traders seeking dependable systems, this version of the RSI strategy likely falls short. However, with careful refinements and complementary filters, RSI can still play a valuable role within a broader, well-designed trading framework.