A trading strategy based on the RSS and RSI.

Finding entry points with the RSS trading strategy

The RSI indicator and the RSS strategy

The RSI (Relative Strength Index) is one of the most popular technical analysis indicators. This indicator detects tops and bottoms in the market price cycle. Trader Ian Copsey works with his own method to find these important tops and bottoms. His interesting solution is the RSS (Relative Spread Strength) indicator.

The RSS calculates the difference between two different moving averages. Copsey uses this difference to do an RSI calculation.

What is the difference in results between the RSI and the RSS? The RSS gives a smoother curve than the RSI. This RSS curve is more suitable for analysing the long-term price cycle and finding entry points. The RSS is, for example, good for finding entry points for stocks and stock market indices to open swing trading positions.

This example shows the RSS and the RSI. The RSS curve is smoother. The RSS is used to analyse the market price cycle. This way entry points can be found. The RSI oscillator is traditionally used for short-term trend analysis and measuring momentum.

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The RSS trading strategy

The trading strategy is based on the RSS but the RSI also plays a role. The indicators are usually measured over 14 periods. Traders can set their own preferences. The basic principle of the RSS strategy are trading signals when

the RSS drops from the oversold zone (>70) into the neutral zone
the RSS rises from the oversold zone (<30) into the neutral zone

A change of zone often indicates when a trend ends and a new trend begins.

In principle, the RSS strategy can be applied in any timeframe. Because the RSS curve is smoother and focuses on the price cycle, the results are better in higher time frames. In the NanoTrader platform, the strategy is set to 60 minutes.

Signals for buyers

If the RSS rises out of the oversold zone, it indicates that the price is gaining strength and the trend is reversing. In parallel, the RSI (not visible) should also rise.

This example shows two signals for buyers.

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Signals for short sellers

If the RSS drops out of the overbought zone, it indicates that the price is losing momentum and the trend is reversing. In parallel, the RSI should also fall.

This example shows two short selling signals.

Closing positions

The RSS strategy does not work with a price target. The trading strategy tries to maximise profits from an open position. To maximise profits, a PeriodsHighLow stop is used.

This stop is often used by experienced traders. This stop intelligently tracks price rises. The RSS strategy calculates the stop over the tops and bottoms of the last 10 candles.

The PeriodsHighLow stop

Dit voorbeeld toont een koopsignaal. De positie wordt de volgende dag met winst gesloten door de PeriodsHigLow stop. De stop volgt op een logische wijze de stijgen de koers.

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Trading

This example shows 5 buy signals and one short sell signal. Notice how the PeriodsHighLow stop tracks the price closely when there is a nice move. In the two signals without a move, the loss is very limited.

The results

Back-testing the RSS strategy apparently gives interesting results. Applying the strategy on stocks to find positions of a day or several days can be more than worthwhile. Setting the chart to hours or even using the day chart is a good starting point.