RSI with EMA Strategy

Contributed by Robert W. Colby, CMT

In my 39 years of actual technical research experience, I have tested many of the analytical tools available. (Okay, so in my early years, I was testing different kinds of graph paper, rulers, and pencils). More than 22 years ago, I reviewed more than a dozen technical analysis software programs for PC Magazine, Special Issue, April 15, 1986, Volume 5, Number 7. MetaStock was new then, practically a startup, but it stood out above the rest, and so I selected it as “Editors’ Choice”. 17 years later, I selected MetaStock software again for exclusive use researching for my 820-page book, The Encyclopedia of Technical Market Indicators, Second Edition, McGraw-Hill Publishing, 2003. I selected MetaStock for its wide-range of powerful capabilities, its flexibility, its ease of use, and its affordability.

While doing research for my book, I ran hundreds of optimizations, back tests, and forward tests. Since then, I since have run thousands more. It is my impression that these very powerful tools are widely misunderstood and underutilized by the great majority of investors and traders. In 2005, I gave an interview to TradingMarkets.com where I demonstrated an optimized version of a robust and very popular technical indicator, RSI 3 (buy below 30, sell above 70), combined with a long-term EMA filter of 330 days, for a simple mechanical trading system that offers moderately good performance with no subjective judgment. RSI alone is a relatively weak performer, but the addition of an EMA to filter the trades is the key to greater consistency of results. Which EMA? Optimize over past actual history to find out. The full MetaStock code is shown below. The chart shows the forward tested, real-time simulated performance of this same system applied to the S&P 500 continuous futures contract since January 3, 2007. Since the Buy Long signal on January 3, 2007, this RSI/EMA system is up 8.60%, significantly outperforming Buy & Hold (which is down 12.00%) by 2060 basis points. Of 24 signals, 66.67% were profitable, with 16 winners and 8 losers. See chart for the Cumulative Equity graphed against the raw closing price data.

The purpose of this demonstration is not to recommend any specific trading system. RSI, though very popular, is not the best indicator, and it certainly is possible to develop much better trading systems than the one shown in this example. My purpose is to show that by using powerful analytical software, such as MetaStock, combining common known indicators, optimizing parameters, back testing, and forward testing, it is possible to develop a trading system that can outperform going forward. More power to you!

RSI/EMA System Code

Enter long:
(RSI(C,opt1)<50-opt2
AND
C>Ref(Mov(C,opt3,E),-1))
AND Year()>2006
Close long:
(RSI(C,opt1)>50+opt2
OR
C<Ref(Mov(C,opt3,E),-1))
AND Year()>2006
Enter short:
(RSI(C,opt1)>50+opt2
AND
C<Ref(Mov(C,opt3,E),-1))
AND Year()>2006
Close short:
(RSI(C,opt1)<50-opt2
OR
C>Ref(Mov(C,opt3,E),-1))
AND Year()>2006

OPT1
Range: From 3 to 3 by 1
Current value: 3
OPT2
Range: From 20 to 20 by 1
Current value: 20
OPT3
Range: From 330 to 330 by 1
Current value: 330

Initial equity - 1424.8
Positions - Long and short
Entry trade price - Close
Entry trade delay - 0
Exit trade price - Close
Exit trade delay - 0
Entry commission - 0%
Exit commission - 0%
Interest rate - 0%
Margin req. - 100%

How can I run an Exploration to find Relative Strength Comparative values?

To construct a Comparative Relative Strength Exploration in MetaStock, please use the following steps below for your version of MetaStock:

MetaStock 8 – 10.1

With the newer versions of MetaStock this can now be done with the Security Data Function.

1. To construct a Comparative Relative Strength Exploration in MetaStock for Windows version 8.01 perform the following steps (This example will reference online data from Reuters DataLink, specifically the S&P 500):
2. Open the Tools menu
3. Select the Explorer
4. Click New
5. Name it Relative Strength Comparative
6. Select the Column A tab:
7. Enter the following formula: C/Security(“ONLINE:.SPX”,C)
8. Click OK
9. Run the Exploration
10. The results are displayed in the exploration report. They can be ranked by selecting the column header.

MetaStock 6.52 – 7.X

In versions of MetaStock for Windows prior to 8.01, this had to be done using the “P” variable and required you to open the chart of the index to be compared against.

1. To construct a Comparative Relative Strength Exploration in MetaStock for Windows, prior to version 8.01, perform the following steps:
2. Open the chart for the desired index.
3. Click to select the price plot (This will place small boxes on the prices to designate that the price has been selected)
4. Create a custom exploration for the Relative Strength Comparative
5. Open the Tools menu
6. Select the Explorer
7. Click New
8. Name it Relative Strength Comparative
9. Select the Column A tab
10. Enter the following formula; C/P (Note: The P variable references the selected indicator in the active chart which would be the close)
11. Click OK
12. Run the Exploration
13. The results are displayed in the exploration report. They can be ranked by selecting the column header.

The Rahul Mohindar Oscillator

What sets MetaStock apart? Well, succinctly stated from the unbiased perspective of the MetaStock sales team; “a lot”. MetaStock feature after MetaStock feature has become the industry standard. Data, charting, back testing, speed and power of analysis, the Explorer, the Expert Advisor, user defined analytics, 150 indicators and line studies, performance systems, unsurpassed support that is free for life… the list goes on and on. One of the most popular, if not revolutionary, features has been the legendary Rahul Mohindar Oscillator (RMO).

The RMO was developed by the famed trader and CNN and CNBC India analyst Rahul Mohindar. It took Asia by storm and now, as released by MetaStock, has become a worldwide phenomenon.

The RMO uses five indicators to detect the correct overall trends in financial markets. It uses multiple criteria to identify a trading opportunity – and provides rules for getting out of a trade; working across any timeframe for a wide variety of securities including stocks, commodities and FOREX.

No system is “one size fits all” or can claim the merits of a crystal ball but the RMO has been successful for legions of users giving them high levels of confidence in their trades by getting them in with the primary trend while keeping a close eye on the swing in the market and market sentiment.

As one customer told me, “The RMO system is truly a winner…the RMO Buy/Sell signals have been fantastic.”

What sets MetaStock apart? The RMO has been a very powerful tool for many, many users and is exclusive to MetaStock. If you are looking for a little more of a trading edge; check out the RMO in MetaStock 10.

Call (800) 587-8014 if you have questions about how MetaStock will improve your trading odds using the RMO or any of our 26 trading systems and unparalleled tools.

Contributed by Greg Allred