Last week’s article set the parameters for the RSI strategy. This week is the fun part where we sort through the results. The charts on this page do not include commissions, spreads or other trading costs unless otherwise noted.

The first chart is the optimized version of the strategy on a 60 minute EUR/USD chart, the original inspiration for concept. The optimization feature was set for return versus maximum loss.



The chart shows a rather steep drawdown for the initial trading, but the strategy performs consistently well after April 2003. This observation encouraged me to perform a “walk forward” test, where the chart is tested on future, unseen data. Again, please note that these charts do not account for trading costs, which negatively impacts performance.



The walk forward test as described above would be invalid if the strategy only traded EUR/USD. The strategy concept appeared during the walk forward time frame, meaning it is not technically unseen. This is unfortunately a limitation of trading forex due to a lack of extensive price history.

The best way to work around this limitation is to test the idea on multiple time frames and multiple currency pairs.

Time Frame Analysis:



The time frame analysis shows that the concept holds up well across any time frame. If the strategy performed well on a 60 minute chart, but then nose dived on a 4 hour chart, this implies that the strategy is unlikely to maintain its performance.

The time frame analysis also allows the trader to zoom in on which time frames are realistic. The 15 minute chart, for example, looks spectacular. The problem is that it does not include trading costs.

The primary cost in the forex market is the spread. Most brokers offer a standard spread of 2 pips on EUR/USD. I like to assume 3 pips when testing to account for slippage, bad markets and other problems.

The 15 minute chart traded a standard lot 1,500 times. If you multiply that by the pip cost and the pip spread, you get:
$10/pip * 3 pips/trade * 1,500 trades = $45,000 in trading costs. The profit of the 15 minute chart is only $30,000.

Conclusion: Trading the 15 minute chart with the RSI strategy is a bad idea. The primary benefit of this analysis is to show that the “raw” concept holds merit, even if it is not a good idea to trade.

The charts greater than 60 minutes deserve attention after considering trading costs. Now it is time to move onto analyzing multiple instruments with trading costs included.

After running numerous tests over the past two years (our non-optimized period), the 4 hour chart performs most consistently across all currency pairs. The charts in the image below include spreads in the performance. They do not include slippage, rollover or any other factors.



The equity curves tell us a lot about the potential behavior of this strategy. Next week’s article analyzes this behavior to avoid trading in unfavorable conditions.