Last Updated on June 19, 2022 by Quantified Trading
Weekly RSI vs daily RSI – what is best? This is a bit like comparing apples to oranges. It might be the same indicator, but RSI can deliver substantially different risk and reward payoffs on different time frames. Risk and reward are matters you can only answer yourself through backtesting.
Which time frame is best in trading? By default, most traders use daily bars. Is that just a habit or is there a logical reason behind it? Let’s do some backtests and find out what might be best for you.
Let’s test to find out the main differences between the two time frames: weekly RSI or daily RSI?
What is the Relative Strength Index (RSI) indicator?
First, we need to explain what the RSI indicator is. We have covered how the RSI indicator works in a previous article and we recommend having a look at that one if you are unsure what the Relative Strength Index is.
Put shortly, the RSI oscillates between 0 and 100 by summarizing the magnitude of both gains and losses over a period of n days. Low values indicate an oversold position while high values might be an overbought condition.
Here is an example of how the RSI oscillates (in the lower pane):
Weekly RSI vs daily RSI – which market?
To find out the main differences we need to perform backtests.
We only want to test on stocks and we use the S&P 500 as a proxy (SPY). The test period is from the ETFs inception, 1993, until today.
Weekly vs daily RSI – we optimize and backtest
Optimization in trading is a handy tool. To find out what is best, weekly RSI vs daily RSI, we do the following backtest and optimization:
- The lookback period is from 2 to 7 days – RSI(n-days) – with one-day intervals.
- The entry-level is when the RSI (n-days) crosses below the entry-level. The entry is set at a minimum of 10 and a maximum of 35 with 5 as intervals.
- The exit level is when the RSI (n-days) crosses above the exit level. The exit is set at a minimum of 65 and a maximum of 90 with 5 as intervals.
All trades are done at the close of the same day as the signal.
Weekly vs daily RSI – the results
Let’s first test by using daily bars. The optimization returns the following results for those simulations with a profit factor of 3.5 and less (those with a higher profit factor has very few trades):
The first column shows the number of days and the second and third the entry and exit level. We can from the table that the best result ar more frequent around 3-5 days.
This is the results of the same optimization by using weekly bars (only profit factors below 5 are considered):
Conclusion: weekly RSI vs daily RSI
There are many differences between weekly and daily bars when you use RSI, but it’s tough or impossible to conclude what is best of weekly or daily RSI. Trading is always a tradeoff between risk and reward. At the end of the day, that is a question you need to find out yourself. It’s a little bit like comparing apples to oranges even though it’s the same indicator.
We end the article by summing up the main differences between weekly RSI and daily RSI:
- You can expect a bigger max drawdown on weekly bars
- There are substantially fewer trades on weekly bars
- You can expect a lower CAGR on weekly bars because you are more likely to miss some of the best days
The problem of missing just a few of the best days is explained in these two articles: