Here’s a free system for you. I call it the “SPY RSI No Lie” system. It’s called that because I like stupid titles, and internal rhymes are an added plus.
I read a post on Jeff Swanson’s System Trader Success recently about using a short-period RSI value to trigger trades with the S&P 500. Jeff’s post was more from a theoretical standpoint, as it used the SPX index (rather than a tradable ETF or future) and also traded on the same day the RSI is calculated. The index issue is easily translated to SPY or an equivalent ETF. Calculating the RSI of the day before the day is actually finished is, well, technically impossible. But in practice, it’s doable in a sort of almost/kinda/fuzzy-round-the-edges sort of way. I thought I’d take a look at an easily tradable system.
This system was optimized on the period of 2000-2013, and then confirmed with out-of-sample data from 2014 through April of 2016.
• $1500 position size (rounded down to whole shares), $30,000 account size.
• no commissions or fees (yeah I know, we’ll get to that.)
• Calculate the two-period RSI for the day, after the close.
• signal is when the RSI value falls below 28.
• Buy at the next open.
• calculate the 7-day moving average of the closing price.
• Sell at the close, when the close is above the previous day’s moving average. Note: this can be a same-day trade.
That’s it! Pretty simple. So let’s take a look at some graphs.
And this is the out-of-sample period. It’s bumpier because the resolution is finer, but it still trends nicely in the right direction. A winner, right?
But wait, what if we throw in some commissions? Our trade size is <=$1500, but what if we’re paying $4.95 each leg of a trade? How does our system work then?
Well hey, that looks like garbage!
And as we zoom in, it still looks like garbage! Commissions are eating up our profits. Which is why you should open a brokerage, because that’s where the real money is…
If you happen to be comfortable risking more than $1500 per trade, you can make the effects of those commissions disappear (almost). I ran an optimization on the position size for this system, and here’s what it looks like:
What if we traded a 3x ETF like UPRO instead? Would that be better?
It’s better than buying SPY with that position/commission size. But the total profit is less (even with the 3x leverage). And you can see 2015 looks like it’s rounding off and heading back the wrong way.
The OOS period is profitable, but only just.
There is, however, a solution to this problem.
Robinhood is a brokerage that you use primarily on your mobile device. And their main selling point: zero commissions.
A quick aside here: I don’t work for them, they’re not paying me, heck they don’t even know I exist. I get nothing for saying this. But it’s such a game-changer to trade with zero commissions, that I just have to mention it. Yes you do still have to pay the exchange fees, but that works out to about 2¢ per trade. This means you can trade with incredibly tiny positions, or use systems that make many incremental and small profits, and not suffer the drag of commissions.
Below is the system trading with SPY and a $1500 position size, but using a $0.03 fee instead of a $0.02 fee…just to be safe.
Looks a lot like our original system, doesn’t it?
And our OOS sample set too. Nice.
That said, Robinhood is a strange beast in some ways. You can set limit orders, stop orders and stop-limit orders. But you can’t do a market-on-close order! I find that incredibly frustrating, because I want the official closing price, not some price that’s sort of near it. This also means I have to be available around 1pm PST to make my trade, which adds a little stress.
You can of course do a market-on-open order, just by placing your order in the after-hours period. What about limit-on-open and limit-on-close orders? Forget about it.
That said, I’ve changed the way I develop my trading systems now. I have two tracks: those that make money with “old fashioned” commissions, and those that make money with zero commissions. I haven’t put all my financial eggs in one basket yet, nor am I likely to. But it sure does give me options like the system above! (No, Robinhood doesn’t do options…)