Today, you’ll learn how to choose RSI period.
- Find Uptrend Stocks
- Get Stock Data
- Optimize with Amibroker
You can choose RSI period by optimizing the period with a computer software.
The computer software often used by most quants is Amibroker.
Before optimizing with Amibroker, traders need to find trending stocks.
Next, they need to get the historical data.
Finally, they can use Amibroker to find the best period of the stock.
The best period is important to find profitable stock entries and exits.
Stock entries and exits depends upon the DNA of the security.
The DNA is the behavior of a stock when the stock hits overbought and oversold levels.
The behavior is how the stock reacts when something happens.
This reaction is usually unique to a particular company.
The unique behavior of a stock may give traders an edge over the other people.
Because other people believe that a trading system will work in every security in the market.
However, every security has its own DNA.
Because of the DNA, system traders need to find what works well with a particular stock.
Further, what works in one stock might not work in other stocks.
1. Find Uptrend Stocks
The are many ways traders can find uptrend stocks.
Well, the examples are:
- Near 52-week high
- RSI 30 at 70 level
- 52-week high / 52-week low =>1.75
- Price is above 200 MA or 200 EMA
Some traders love stocks that are near their 52-week high.
The 52-week high can be screened with investing.com tool. (source)
The tool can find stocks within 20% below their 52-week high.
20% is good when traders are looking for a break-out.
In breakout set-ups, the most logical to do is to buy below resistance.
Buying below resistance helps to avoid FOMO or Fear Of Missing Out.
FOMO always happens at the break of support and resistance.
However, at the break, most traders often lost more money than what was originally planned.
Money are lost because it is to risky to buy at the top.
The risk at the resistance is too high because the resistance is strong.
It is strong because traders are afraid to hold their positions at that level.
Holding full stock positions at profit-taking areas is not recommended.
At profit-taking areas, traders often close out half of their positions.
Half will be left to try to anticipate a breakout.
A breakout may or may not happen and it is important to set stop loss.
2. Get Stock Data
After creating the list of uptrend stocks, it is recommended to get stock historical data.
The data is available at investing.com by selecting a stock and clicking on historical data.
The data must be at least five years so that traders can test the RSI period in the sample and out-of-sample.
Sample can be the first 2.5 years and the next can be the last 2.5 years.
In the next 2.5 years, it is the period where RSI periods are validated.
Validation is needed to see what period works in a particular stock.
Because what works in a particular stock does not necessarily work in other stocks.
It does not work because each stock has its own behavior.
For example, hypothetically, APPL can be oversold at 30 using the 15 periods.
The example is not real because optimization is needed to get the best result.
Optimization is also important because it takes a lot of time.
To save time, Amibroker is used for optimization of RSI period for each uptrend stock.
The uptrend stocks were already filtered in step one (1).
Step one is very important so that time is not wasted.
Wasted time is also wasted money.
3. Optimize with Amibroker
After step two(2), it is time to select the RSI period.
To select the best period, the best way to do is optimize it with Amibroker.
Optimizing is simple and below is a video example:
The video is not about RSI but it is a good illustration.
For RSI, the AFL code is modified to get the optimize period.
The modification can be using 70 and 30 levels in the code and using variables for the period.
The variables are automatically set by Amibroker.
New version of Amibroker does not look like what is on the video.
However , the video shows that selecting the RSI period is easy.
It is easy because it is automatic.
Because it is automatic, the best RSI period for a particular stock is possible to get.
It is possible because the settings are optimized in the sample and out-of-sample data.
Optimization is what system traders are always doing.
System traders are paid Thousands of Dollars just to come up with profitable trading systems.
Then the trading system will be used by hedge funds and large institutions.
Hedge funds do not buy or sell stocks because of RSI 14 oversold and oversold levels.
They buy stocks because they have optimized signals in a particular stock.
Optimizing is actually a way to discover new trading systems.
Then, new trading systems are backtested with the same tool used for optimization.
Backtesting also requires sample and out-of-sample data.
Sample and out-of-sample data are really important to discover or test trading strategies.