Using IBS and RSI for Short-Term Mean Reversion Trading

So in an earlier book review: Book Review of How Markets Really Work by Laurence Connors, it noted that Wilder’s RSI(2) was found to be the best indicator. RSI(2) < 5 was shown to lead to short-term gains, while RSI(2) > 95 led to stalled rallies.

I recently came across a number of other blogs which wrote about this same phenomena showing good results. Many used an Internal Bar Strength (IBS) indicator. IBS = (Close – Low) / (High – Low).

Just wanted to do a quick summary here.

  1. QUSMA used IBS as a filter
    • Go long QQQ when IBS < 50% and Cutler’s RSI(3) < 10.
    • IBS < 50% helped to filter out bad RSI(3) entry signals (removing 35% of the signals)
    • Enter at the close of the same day of the signal, and exit at the close of the following day.
    • The test period appears to be from 1999 to 2012.
  2. Adaptive Trader used a X-day SMA of the IBS
    • Go long SPY if IBS < 45% (exit when IBS > 45%) and short if IBS > 95% (cover when IBS < 95%).
    • The best setting appears to be to just use the 1-day IBS.
    • The test period was from 1/1/2000 to 12/26/2012.
  3. Intelligent Trading Tech used a training period to optimize the thresholds
    • Go long SPY when IBS < 20% and go short SPY when IBS > 100% (optimized thresholds, 100% means will never go short).
    • Entry occurs at the close of the day of the signal, exit is next day’s close.
    • The test period appears to  be from 1993 to 2012.
  4. A Trader Journal looked at performance in bull and bear markets
    • Go long at the open the next day, if IBS < 25%. Exit at the open the following day.
    • Strategy performed better in bear markets than in bull markets.
    • The test period was from 1996 to 2012.



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