2 period RSI

Little Intro of 2-Period RSI

In early 2005, TradingMarkets published RSI-R2 strategy which quickly became one of the most popular strategis. This strategy was presented at "The Traders Expo" in late 2006 and also in the "Moneyshow.com" it was voted as the number one strategy under "Best for Traders" category.

Thanks to Mr.Sameer who made this strategy popular in India. There are many sites which give live 2-period RSI of NIFTY.
I have seen many of my friends blindly flow the RSI(2) and most of the time they get confused and caught on wrong side.
Based on my research over a period of time there is more statistical profit if you flow the below rule.

Strategy setting:

Simple changing the default RSI(14) value to RSI(2).

When we shorten the RSI period to a 2 or 3 or 4 the test result is significant. By using the 2-period RSI you can see back-tested result is above 75% in NIFTY from 2000-2009.

Rules
Nifty or any stock is above its 200-day simple moving average.

Day 1 - the 2-period RSI is below 65. This tells us that the market is in a neutral to possibly oversold condition.

Day 2 - the 2-period RSI closes lower than Day 1.

Day 3 - the 2-period RSI closes lower than Day 2.

Buy the market (Nifty or any of your favorite) on the close Day 3.

Exit when the 2-period RSI closes above 75.



Detailed view of 2-period RSI

Using a EOD timeframe, first, get the closing value of RSI three days ago (RSI_Day_1), the closing value of RSI two days ago (RSI_Day_2) and the value of RSI one day ago (RSI_Day_3) . Also, get the closing value of a 200-day simple moving average one day ago (SMA200_Day3). This is our primary buy/sell trigger.


BUY SIGNAL
If the value of RSI_Day_1 < 65 and the value of RSI_Day_2 < RSI_Day_1 and the value of RSI_Day_3 < RSI_Day_2 and the value of Closing Price from one day ago is SMA200_Day3, we have a Buy signal

SELL SIGNAL
If the value of RSI_Day_1 35 and the value of RSI_Day_2 RSI_Day_1 and the value of RSI_Day_3 RSI_Day_2 and the value of Closing Price from one day ago is < SMA200_Day3, we have a Sell signal

EXIT SIGNAL
If we have an open Buy order in progress and the value of RSI_Day_3 75, we close the order because RSI is entering extreme overbought status (reversal coming?) If we have an open sell order and the value of RSI_Day_3 < 25, we close the order because RSI is entering extreme oversold status.

Note: We don't need any charting application to calculate 2-period RSI which can be easily done by Microsoft EXCEL programming. I will explain how to calculate this using excel sheet little later.


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