Is the RSI indicator good for swing trading? Let's find out…
In this post, I'll show you my actual results from backtesting the RSI Divergence strategy on 27 currency pairs. The test had an overall +235.39% cumulative return, showing that this could be a viable RSI strategy for swing trading.
But remember that good backtesting results do not guarantee success in live trading. Always test strategies for yourself, never trust anyone that says a strategy works (including me). You may have a different way of looking at the market, which will cause you to trade it in a different way.
Backtesting also helps to:
- Show you if a strategy has a historical edge and works for you
- Give you a reference point to compare your live trades
- Build your confidence in trading a strategy
- Give you practice with a trading strategy (even when the markets are closed)
Just to be clear, this was a manual backtest.
I might try to automate this strategy (or do Incremental Automation) in the future, but I was looking for a manual trading strategy, so that's how I tested it.
Alright, now let's get into the details…
The RSI Divergence Swing Trading Strategy
This strategy uses RSI Divergence to identify potential trades. To learn the basics of divergence, read RSI Divergence explained.
If you want the complete trading strategy plan that I tested, you can get it in this blog post. For a detailed description of how the RSI indicator works, read this blog post.
There are some trade entry filters that might make my entries different from how other traders trade it, so be sure to reference the strategy blog post if you have any questions.
I only tested this strategy on the daily chart.
Testing Tools
For this round of testing, I only used 2 tools:
- Forex Tester
- Numbers for Mac
Forex Tester speeds up the process by automatically recording your trades, calculating stats and gives you an easy way to download historical data.
Trading Heroes readers get a discount on Forex Tester. Click here to get your discount coupon.
You can also use other platforms like TradingView or MT5, but the process will be slower because you have to update a second spreadsheet to record your trades.
I only used Numbers to record the results of testing, so I could get totals and averages.
Historical Time Period
I tested each pair with as much historical data as I could get my hands on.
Most of the major currency pairs were tested from 2003. The crosses and more exotic pairs were tested from 2006, and a couple started as late as 2012.
That's the data that Forex Tester had available, so that's what I used.
Testing Time
Since this test was done on the daily chart, each pair could be tested in about 90 minutes. So the total test took about 40 hours.
When testing the daily timeframe and higher, it's possible to test all of the data in a reasonable amount of time, so I do a complete test.
If I'm testing a lower timeframe, I usually “spot test” certain date ranges to get a good feel for how well the strategy works, without wasting time.
The most important thing to note here is that most trading strategies out there are easy to learn.
However, most new traders don't understand the additional work that goes into mastering a trading strategy.
Testing and practicing a strategy takes time.
Anyone who tells you that you can learn a strategy today and be successful tomorrow is straight-up lying to you.
So if you are serious about becoming a successful trader, you need to put in the time to test and practice.
To learn how to do backtesting and forward testing in a systematic way, join the TraderEvo Program. You will also learn how to figure out what to do when each step doesn't appear to be working.
Overall Stats
Before we start digging into the results from each currency pair, here are the overall stats:
- Average win rate per pair: 78.74%
- Average return per pair: 8.71%
- Average number of trades per pair: 14
- Total number of trades: 373
- Total return: 235.29%
Since this is a swing trading strategy, a lower number of trades per year is expected.
The yearly return may also seem a little low to some traders.
Before you write off this strategy however, consider this:
- You can always add more strategies later
- This might also work on lower timeframes
- You might be able to add more currency pairs
- You might be able to increase the return on each trade
But these initial results are solid and worth moving forward with. Now let's get into the specific results by currency pair.
Backtesting Results
Win Rate
First let's look at the win rate. The win rate for this strategy was pretty high, averaging about 79% per pair.
So this is potentially a good strategy for traders who like to win a lot.
In the future, I could test going for bigger wins per trade, but at a lower win rate.
However, for now, I like these results, so I'm going to move forward.
Total Return
Now let's look at the total return for each pair.
Again, these returns look low because if you divide each of them by the number of years tested, you get a really small number. However, if you add all of the pairs together, the average is about 13% per year.
Not too shabby for one simple swing trading strategy. Add a couple more strategies with a similar return and you can potentially beat many fund managers.
Of course, you could filter out some of the lower performing pairs, to potentially boost the performance of the strategy.
Number of Trades
Finally, let's take a look at the number of trades that were executed for each currency pair.
Some people may say that this isn't a valid test because there weren't enough trades per test to achieve a high enough level of confidence. There is some validity to that argument…if I only tested 2 or 3 pairs.
However, when you test the same strategy across 27 pairs, you can get a big enough data set to make some statistically valid conclusions. Since there were 373 trades in this round of testing, that's more than enough trades to warrant moving on to the next step of forward testing (or beta testing).
How to Get RSI Alerts
Luckily it's easy to setup alerts, when trading RSI. This means that you don't have to sit in front of your computer all day, in order to spot RSI trades.
There are 3 simple steps to using an alerts indicator for RSI divergence trading:
- Install the indicator and set it to your favorite overbought/oversold settings.
- When the indicator sends you an alert, but that currency pair on your watchlist.
- Check your watchlist pairs at the close of every candle, if possible. When there is divergence, take a trade.
You can download easy-to-use RSI indicators here.
Final Thoughts on this RSI Strategy for Swing Trading
Since my testing shows that RSI Divergence is potentially a good swing trading strategy, the next step will be to put these into forward testing to see how well this works.
If you want to discuss RSI Divergence every week, join the private group. It's free and can help you find new setups and learn more about this strategy.
Remember not to trade this live, just because backtesting says that this is a good strategy. Backtesting does have its limitations, which I talk about in detail here.
Always do the forward testing step before going live.
To learn how to do backtesting and forward testing in a systematic way, join the TraderEvo Program. You will also learn how to figure out what to do when each step doesn't appear to be working.
