RSI QQQ (RSI Mean Reversion Trading Strategy QQQ)

Last Updated on June 19, 2022 by Quantified Trading

We have previously published an article on using RSI on SPY (relative strength index). The RSI has proven to be a valuable indicator/tool for mean reversion in the main stock indices.

In this article, we look at how the RSI performs on QQQ – an RSI mean reversion trading strategy. At the end of the article, we add another indicator to boost performance (successfully). RSI 2 QQQ works well!

First, please read what the Relative Strength Index (RSI) is and what mean-reversion is:

You might also be interested in our RSI SPY trading strategy.

What is a good RSI for Nasdaq and QQQ?

RSI is a mean-reversion indicator and thus the strategy works best with a low reading on the RSI.

What is a low reading? In general, that is reading below 30. The lower the number of days used in the calculation, the more sensitive and volatile the RSI is.

In this article, we use only two days for the RSI (RSI 2). This means a low reading on the RSI is required to enter a position:

RSI QQQ strategy:

Let’s test the RSI by setting the RSI reading to lower than 10. The rules are like this:

  1. RSI(2) must be lower than 10.
  2. If number one is true, then enter at the close.
  3. Exit at the close when today’s close is higher than yesterday’s high.

These simple rules produce this equity curve (logarithmic chart):

 

The trading performance metrics look like this:

Buy and hold returns 6.39%, while the RSI 2 strategy returns 10.01%, a pretty big difference. Even better, the strategy has performed very well in four bear markets (2000-2002, 2008/09, 2018, and Covid-19 in March 2020). RSI QQQ works well!

What happens if we change the buy criteria to 5, ie, that the two-day RSI must be lower than 5?

The average gain increases, but the total return goes down due to lower time spent in the market due to less trades.

But the strategy can be improved. Let’s add another indicator:

RSI(2) QQQ works better with the second indicator:

By adding a second indicator, but still requiring the RSI(2) to be below 10 (not below 5) we get this equity curve on QQQ (logarithmic chart):

When we added the second indicator, we got the following stats:

The CAGR is 12.75% (buy and hold is 6.4%), the time spent in the market is 14%, there are 196 trades, 75% winners, the average winner is 2.5%, the average loser is 2.18%, the profit factor is 3.15, max drawdown is 19.5%, and the Sharpe Ratio is 2.85. All in all, we would say these are pretty good numbers! RSI QQQ works really well with an additional parameter.

If you want to have the code for the strategy producing the three last equity charts (including Amibroker/Tradestation code plus “plain English”), you can order it for 75 USD via this link (RSI + Second Indicator (Strategy no. 4):

When you have paid, please press the link below to access the code (PDF file):

Download RSI + Second Indicator (Strategy no. 4) by clicking here (you need to pay for access)

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RSI 2 Trading strategy – conclusions:

The RSI is a very good mean reverting indicator. We did a test about the best oscillating indicator for trading strategies, and RSI is among the best – but not the best.

RSI 2 QQQ works almost like magic – better than on the S&P 500.

 

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  • Thank you for sharing Oddmund. In my research the IBS edge on the indexes did not exist prior to 1997. Do you have any conjecture as to why this may be the case? Also, any advice in how to differentiate between normal drawdown and an edge disappearing? How have you determined when to stop/pause trading a given strategy over the course of your career?

    Thank you kindly,
    Zimmer

    • Hi Mitch,

      Yes, it didn’t work prior to 1997. Before that date “trend following” worked much better than mean reversion. I guess it all goes in cycles, which of course makes it very hard to speculate.

      My best strategy stopped performing in 2017, and I gave it one year with break even before I gave up. It worked very well for 15 years from 2002!

      Unfortunately, I have no clear cut ideas about when to give up and move up…..