We covered the history and the basics behind the 2-period RSI in the first installment of this series, and we hope you now have a sense of how powerful this indicator can be and why we choose to base so many of our trading strategies around it.
To reiterate again: the closer the 2-period RSI reading of a security reaches 10 and lower, the more oversold it now is. As the 2-period RSI level reaches 90 and higher, the more overbought. Throughout years of testing we’ve verified that a stock currently trading above its 200-day simple moving average with a 2-period RSI level of below 2 has a very high probability of over-performing the short-term.
Now let’s apply this indicator to one of the most popular types of trading out there: pullback trading. We’ve combed through dozens of well-known and ‘leading’ pullback strategies to see how they perform in the real world, and the simple truth is few exhibit tiny edges or no discernible edges at all.
Click here to learn exactly how you apply the single best swing trading indicator to your trading with The 2-Period RSI Pullback Trading Strategy.
A short-term time frame in conjunction with the 2-period RSI has proven to yield the highest returns when trading pullbacks.
Since there’s not a consistently accurate way of predicting how far an upward move after a pullback might be, laying out an exit strategy is equally as important when trading pullbacks. We’ll cover that aspect of pullback trading in part 3 of this series, but for now let’s take a look at a strategy we recently published in our latest guidebook: The Long Pullbacks Strategy.
We require exact rules and high-performing quantified test results to trade on a strategy, including strong test results on the majority of parameters of testing. Everyone has a unique trading style and philosophy, but utilizing the 2-period RSI with the proper strategy can be easily adapted to accommodate your own goals.
Below is an example of a trade identified, placed, and exited using The Long Pullbacks Strategy:
VELT – 4/10/12 – 4/12/12
On 4/10/12 VELT displays a long entry signal according to The Long Pullbacks Strategy at 11.27 in oversold territory. 2 days later following the pullback VELT is now trading at 12.86 and displays an exit signal in oversold territory for a 14% gain.
Our test results have shown that buying a stock trading above its 200-day MA with a 2-period RSI reading below 10 (with greater edges existing at 5, 2, and 1) has statistically shown a reversion from a pullback in the short-term. Even larger edges occur with further pullbacks that occur intraday as people scramble to exit their positions out of self-preservation. These are the trades you want to take advantage of, using the 2-period RSI as a key component of determining when conditions are right.
We’ve established why we use the 2-period RSI on a regular basis, and as a tenet of swing trading we’ve shown why trading pullbacks can offer significant opportunities to active traders. Now we need to bring everything together with the role of a proper exit strategy, which we’ll cover in the final edition of this series.