The RSI Three Strikes and You’re Out Play

Author: sedelstein

Creation Date: 8/12/2014 4:27 PM

Wealth Lab » Trading Strategies » The RSI Three Strikes and You’re Out Play

sedelstein

8/12/2014 4:27 PM

I read about this setup here http://jayonthemarkets.com/ but I'm finding it tricky to code.

Anyone here care to take a look?

The RSI Three Strikes and You’re Out Play

So we will use the 3-day RSI indicator as a trigger to alert of a potential top. Note the use of the phrase “potential top.” Note also that nowhere do the words, “pinpoint”, “market” or “timing” appear. So here is how it works:

1. (Day x) Price and 3-day RSI make a new high for a given move.

2. (Day y) After at least one intervening down day, price makes a higher close than on Day x BUT 3-day RSI stands below its level on Day x.

3. (Day z) After at least one intervening down day, price makes a higher close than on Day y, BUT 3-day RSI stands below its level on Day y.

4. After Day z the entry trigger occurs the next time price drops below the 3 day low.

To put it another way, after Day x price makes two higher closing peaks (with at least one down day between these peaks), while RSI on Day y is below RSI on Day x and RSI on Day z is below RSI on Day y. OK, that’s as clear as mud.

Eugene

8/13/2014 2:15 AM

It looks quite easy to code if you follow the design pattern on programming setups, triggers, delays, and timeouts.

Since it's not positioned as a complete strategy, I added a time-based exit. Takes multiple positions. Also makes good sense to introduce a timeout to avoid spanning many months from day x to day y/z.

Author's rules are not always clear so feel free to modify. In particular, how you define a down day (see isDownDay() ):

CODE:
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It looks quite easy to code if you follow the [link=http://www2.wealth-lab.com/WL5WIKI/kbSetupsTriggersDelaysTimeouts.ashx]design pattern on programming setups, triggers, delays, and timeouts[/link].

Since it's not positioned as a complete strategy, I added a time-based exit. Takes multiple positions. Also makes good sense to introduce a timeout to avoid spanning many months from day x to day y/z.

Author's rules are not always clear so feel free to modify. In particular, how you define a down day (see [i]isDownDay()[/i] ):

[code]using System;
using System.Collections.Generic;
using System.Text;
using System.Drawing;
using WealthLab;
using WealthLab.Indicators;

namespace WealthLab.Strategies
{
	public class ThreeStrikesStrategy : WealthScript
	{
		StrategyParameter paramPeriod;
		StrategyParameter paramTimeout;
		StrategyParameter paramExit;
		
		public ThreeStrikesStrategy()
		{
			paramPeriod = CreateParameter("Period", 3, 1, 50, 1);
			paramTimeout = CreateParameter("Timeout", 50, 1, 100, 1);
			paramExit = CreateParameter("Exit after", 10, 1, 50, 1);
		}
		
		bool isDownDay(int bar1, int bar2)
		{
			bool result = false;
			for( int i = bar1; i >= bar2; i--) // At least one down day
			{
				if( High[i] < High[bar2] )
				{
					result = true;
					break;
				}									
			}
			return result;
		}
		
		void dayEvent( out bool dayx, out int barx, string annotation, int bar, Color color)
		{
			dayx = true;
			barx = bar;
			AnnotateBar( annotation, bar, true, Color.Black );
			SetPaneBackgroundColor( PricePane, bar, Color.FromArgb( 30, color ) );
		}
		
		protected override void Execute()
		{
			bool dayX = false, dayY = false, dayZ = false;
			int period = paramPeriod.ValueInt, barX = -1, barY = -1, barZ = -1, timeout = paramTimeout.ValueInt, exit = paramExit.ValueInt;
			RSI rsi = RSI.Series(Close,period);
			Highest hi = Highest.Series(High,period);
			Highest hiRSI = Highest.Series(rsi,period);
			Lowest lo = Lowest.Series(Low,period);
			
			HideVolume();
			ChartPane rsiPane = CreatePane(30,true,true);
			PlotSeries(rsiPane,rsi,Color.Blue,LineStyle.Solid,2);
			PlotSeries(PricePane,hi,Color.Blue,LineStyle.Dashed,1);
			PlotSeries(PricePane,lo,Color.Red,LineStyle.Dashed,1);
			
			for(int bar = GetTradingLoopStartBar(period); bar < Bars.Count; bar++)
			{
				for(int p = ActivePositions.Count - 1; p >= 0; p--)
				{
					Position pos = ActivePositions[p];
					if ( bar+1 - pos.EntryBar >= exit )
						SellAtMarket( bar+1, pos, "Timed" );
				}
				
				
				//1. (Day x) Price and 3-day RSI make a new high for a given move.
				
				if( !dayX ) 
				{
					if( High[bar] > hi[bar-1] && rsi[bar] > hiRSI[bar-1] )
						dayEvent( out dayX, out barX, "Day X", bar, Color.Red );
				}

if( dayX )
				{
					//Reset if setup has timed out (too many days have passed since Day X w/o reaching Day Y/Z)
					if( bar - barX >= timeout )
					{
						dayX = false;
						AnnotateBar( "Expired", bar, true, Color.Black );
					}
					
					//2. (Day y) After at least one intervening down day, price makes a higher close than on Day x 
					//BUT 3-day RSI stands below its level on Day x.
					
					if( !dayY )
					{
						if( bar > barX + 1 )
						{
							// At least one down day
							if( isDownDay(bar,barX) )
								if( High[bar] > hi[barX] && rsi[bar] < rsi[barX] )
									dayEvent( out dayY, out barY, "Day Y", bar, Color.Orange );
						}
					}
					
					if( dayY )
					{
						//3. (Day z) After at least one intervening down day, price makes a higher close than on Day y, 
						//BUT 3-day RSI stands below its level on Day y.
						
						if( !dayZ )
						{
							if( bar > barY + 1 )
							{
								// At least one down day
								if( isDownDay(bar,barY) )
									if( High[bar] > hi[barY] && rsi[bar] < rsi[barY] )
										dayEvent( out dayZ, out barZ, "Day Z", bar, Color.Green);
							}
						}
						
						if( dayZ )
						{
							//4. After Day z the entry trigger occurs the next time price drops below the 3 day low.
							
							if( Low[bar] < lo[bar-1] )
								if( BuyAtMarket( bar + 1 ) != null )  
								{
									dayX = false; dayY = false; dayZ = false;
								}
						}
					}
				}
			}
		}
	}
}[/code]

sedelstein

8/13/2014 6:23 AM

Thanks for modelling this up Eugene. I hope it proves useful for the community. The author's webpage is worth checking now and again as well. It's often easy to find candidates worth buying. I hope this setup is worthwhile for establishing shorts

Steve

LenMoz

8/18/2014 3:36 PM

Sedelstein,

QUOTE:
Anyone here care to take a look?

I took a look, and found some interesting things.
1. Per the web site and post #1, "So we will use the 3-day RSI indicator as a trigger to alert of a potential top." - with the author suggesting the pattern signals a potential time to buy puts. I didn't realize this at first - more on that later.

So, starting with Eugene's code, I "embellished" it.
1. For the "Day X" signal, rather than a single day drop, I used the PeakBar indicator with the percentage drop as a parameter
2. I modified Eugene's IsDownDay function to compare Close rather than High and to compare to the prior bar, not the "Day X" bar
At this point, I "Optimized" it, running a 10-year backtest on the S&P 500 portfolio.

Result? APR=22.36%(BH 13.72%) S&P 500, 1Jan2004, 5% equity {3.1,10,49,37} - a fair amount better than buy-and-hold.

That's when I realized that it was backwards, and should be taking short, not long, positions, to simulate buying puts.

3. I changed BuyAtMarket to ShortAtMarket and SellAtMarket to CoverAtMarket and optimized again

Surprisingly(?), the results were far worse, APR barely 1%, barely able to produce a positive result.

4. Seeing this, I made one more change, adding a Boolean (SHORTING) near the top of the code so the long or short side can be tested.

Code is below. Do you think the author would be interested in this test result?

Len

CODE:
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Sedelstein,

[quote]Anyone here care to take a look?[/quote]
I took a look, and found some interesting things.
1. Per the web site and post #1, "So we will use the 3-day RSI indicator as a trigger to alert of a potential top." - with the author suggesting the pattern signals a potential time to buy puts.  I didn't realize this at first - more on that later.

So, starting with Eugene's code, I "embellished" it.
1. For the "Day X" signal, rather than a single day drop, I used the PeakBar indicator with the percentage drop as a parameter
2. I modified Eugene's IsDownDay function to compare Close rather than High and to compare to the [u]prior[/u] bar, not the [u]"Day X"[/u] bar
At this point, I "Optimized" it, running a 10-year backtest on the S&P 500 portfolio.

Result? APR=22.36%(BH 13.72%) S&P 500, 1Jan2004, 5% equity  {3.1,10,49,37} - a fair amount better than buy-and-hold.

That's when I realized that it was backwards, and should be taking short, not long, positions, to simulate buying puts.

3. I changed BuyAtMarket to ShortAtMarket and SellAtMarket to CoverAtMarket and optimized again

Surprisingly(?), the results were far worse, APR barely 1%, barely able to produce a positive result.

4. Seeing this, I made one more change, adding a Boolean (SHORTING) near the top of the code so the long or short side can be tested.

Code is below.  Do you think the author would be interested in this test result?

Len
[code]using System;
using System.Collections.Generic;
using System.Text;
using System.Drawing;
using WealthLab;
using WealthLab.Indicators;

/*
1. (Day x) Price and 3-day RSI make a new high for a given move.
2. (Day y) After at least one intervening down day, price makes a higher close than on Day x BUT 3-day RSI stands below its level on Day x.
3. (Day z) After at least one intervening down day, price makes a higher close than on Day y, BUT 3-day RSI stands below its level on Day y.
4. After Day z the entry trigger occurs the next time price drops below the 3 day low.

13Aug2014 (Long) APR=22.36%(BH 13.72%) S&P 500, 1Jan2004, 5% equity  {3.1,10,49,37}
16Aug2014 (Long)  APR=18.42%(BH  7.48%) Nasdaq 100, 1Jan2004, 5% equity {1.4,11,53,42}
*/
namespace WealthLab.Strategies
{
	public class RSI3Strikes : WealthScript
	{
		// The author intended "SHORTING = true"
		bool SHORTING = true;  // true=>Short/Cover; false=>Buy/Sell

StrategyParameter paramPeakPct;
		StrategyParameter paramPeriod;
		StrategyParameter paramTimeout;
		StrategyParameter paramExit;
      
		public RSI3Strikes()
		{
			paramPeakPct = CreateParameter("Peak %", 3.1, 1.0, 4.0, 0.1);
			paramPeriod = CreateParameter("Period", 10, 1, 30, 1);
			paramTimeout = CreateParameter("Timeout", 49, 10, 100, 1);
			paramExit = CreateParameter("Exit after", 37, 10, 50, 1);
		}
      
		bool hadDownDay(int currBar, int origBar) // currBar, origBar
		{
			bool result = false;
			for( int i = currBar; i >= origBar + 1; i--) // At least one down day
			{
				if( Close[i] < Close[i - 1] ) // Close[i - 1] instead of High[origBar], Close instead of High ljm
				{
					result = true;
					break;
				}                           
			}
			return result;
		}
      
		void dayEvent( out bool dayx, out int barx, string annotation, int bar, Color color)
		{
			dayx = true;
			barx = bar;
			AnnotateBar( annotation, bar, true, Color.Black );
			SetPaneBackgroundColor( PricePane, bar, Color.FromArgb( 30, color ) );
		}
      
		protected override void Execute()
		{
			bool dayX = false, dayY = false, dayZ = false;
			double peakPct = paramPeakPct.Value;
			int period = paramPeriod.ValueInt;
			int barX = -1, barY = -1, barZ = -1;
			int timeout = paramTimeout.ValueInt;
			int exit = paramExit.ValueInt;
			int priorPkBar = -1;
			RSI rsi = RSI.Series(Close,period);
			RSI rsi14 = RSI.Series(Close,14); // Used for trade Priority only
			DataSeries pkBar = PeakBar.Series(High, peakPct, WealthLab.Indicators.PeakTroughMode.Percent);
			Highest hi = Highest.Series(High,period);
			Highest hiRSI = Highest.Series(rsi,period);
			Lowest lo = Lowest.Series(Low,period);
         
			HideVolume();
			ChartPane rsiPane = CreatePane(30,true,true);
			PlotSeries(rsiPane,rsi,Color.Blue,LineStyle.Solid,2);
			PlotSeries(PricePane,hi,Color.Blue,LineStyle.Dashed,1);
			PlotSeries(PricePane,lo,Color.Red,LineStyle.Dashed,1);
			for(int bar = GetTradingLoopStartBar(period); bar < Bars.Count; bar++)
			{
				for(int p = ActivePositions.Count - 1; p >= 0; p--)
				{
					Position pos = ActivePositions[p];
					if ( bar+1 - pos.EntryBar >= exit ) {
						if (SHORTING)
							CoverAtMarket( bar+1, pos, "Timed" );
						else
							SellAtMarket( bar+1, pos, "Timed" );
					}
				}
            
            
				//1. (Day x) Price and 3-day RSI make a new high for a given move.
 				if( !dayX ) 
				{
					// ljm Replaced this: if( High[bar] > hi[bar-1] && rsi[bar] > hiRSI[bar-1] )
					if( pkBar[bar] != -1) {
						int i = (int)pkBar[bar]; // "i" is the bar of the potential peak (in the past)
						if( (pkBar[bar] != pkBar[bar - 1]) && rsi[i] > hiRSI[i-1] )
							dayEvent( out dayX, out barX, "Day X", i, Color.Red );
					}
				}

if( dayX )
				{
					//Reset if setup has timed out (too many days have passed since Day X w/o reaching Day Y/Z)
					if( bar - barX >= timeout )
					{
						dayX = false; dayY = false; dayZ = false; // Timed out - reset all signals
						AnnotateBar( "Expired", bar, true, Color.Black );
					}
				}
                if ( dayX )
				{
					//2. (Day y) After at least one intervening down day, price makes a higher close than on Day x 
					//BUT 3-day RSI stands below its level on Day x.
               
					if( !dayY )
					{
						if( bar > barX + 1 )
						{
							// At least one down day
							if( hadDownDay(bar,barX) )
								if( Close[bar] > Close[barX] && rsi[bar] < rsi[barX] )
									dayEvent( out dayY, out barY, "Day Y", bar, Color.Orange );
						}
					}
               
					if( dayY )
					{
						//3. (Day z) After at least one intervening down day, price makes a higher close than on Day y, 
						//BUT 3-day RSI stands below its level on Day y.
                  
						if( !dayZ )
						{
							if( bar > barY + 1 )
							{
								// At least one down day
								if( hadDownDay(bar,barY) )
									if( Close[bar] > Close[barY] && rsi[bar] < rsi[barY] ) // From High to Close ljm
										dayEvent( out dayZ, out barZ, "Day Z", bar, Color.Green);
							}
						}
                  
						if( dayZ )
						{
							//4. After Day z the entry trigger occurs the next time price drops below the 3 day low.
                     
							if( Low[bar] < lo[bar-1] ) {
								if (SHORTING) {
									if( ShortAtMarket( bar + 1 ) != null )  
									{
										LastPosition.Priority = 0 - rsi14[bar]; // Priority helps optimization
										dayX = false; dayY = false; dayZ = false;
									}
								}
								else {
									if ( BuyAtMarket( bar + 1 ) != null ) {
										LastPosition.Priority = 0 - rsi14[bar]; // Priority helps optimization
										dayX = false; dayY = false; dayZ = false;
									}
								}
							}
						}
					}
				}
			}
		}
	}
}[/code]