TradingMarkets | How to use the 2-Period RSI

How to use the 2-Period RSI

TradingMarkets | How to use the 2-Period RSI
As mentioned above, the default/most common setting for RSI is 14-periods. You can change this default setting in most charting packages very easily but if you are unsure how to do this please contact your software vendor.

2-Period RSI

We looked at over seven million trades from 1/1/95 to 6/30/06*. The table below shows the average percentage gain/loss for all stocks during our test period over a 1-day, 2-day, and 1-week (5-days) period. These numbers represent the benchmark which we use for comparisons.

We then quantified overbought and oversold conditions as measured by the 2-period RSI reading being above 90 (overbought) and below 10 (oversold). In other words we looked at all stocks with a 2-period RSI reading above 90, 95, 98 and 99, which we consider overbought; and all stocks with a 2-period RSI reading below 10, 5, 2 and 1, which we consider oversold. We then compared these results to the benchmarks, here's what we found:

Oversold

* The average returns of stocks with a 2-period RSI reading below 10 outperformed the benchmark
1-day (+0.06%), 2-days (+0.21%), and 1-week later (+0.50%).
* The average returns of stocks with a 2-period RSI reading below 5 significantly outperformed the benchmark
1-day (+0.12%), 2-days (+0.33%), and 1-week later (+0.65%).
* The average returns of stocks with a 2-period RSI reading below 2 significantly outperformed the benchmark
1-day (+0.22%), 2-days (+0.51%), and 1-week later (+0.87%).
* The average returns of stocks with a 2-period RSI reading below 1 significantly outperformed the benchmark
1-day (+0.27), 2-days (+0.62%), and 1-week later (+1.05%).

When looking at these results, it is important to understand that the performance improved dramatically each step of the way. The average returns of stocks with a 2-period RSI reading below 2 were much greater than those stocks with a 2-period RSI reading below 5, etc.

This means traders should look to build strategies around stocks with a 2-period RSI reading below 10.

Overbought. . .