Fresh Batch of “Losers” – RSI, CCI, and Williams %R Indicators

Fresh Batch of “Losers” – RSI, CCI, and Williams %R Indicators

We have already crash tested a Moving Average indicator and tried to find some profitable regularities when using it. We would like to remind those who can’t remember/didn’t read the following: success of the trade made using the Moving Average indicator was 50.94% that is very close to flipping a coin.

It is obvious from the title that in this article we’re going to test three indicators: Relative Strength Index (RSI), Commodity Channel Index (CCI), and, at the request of a reader, Williams %R indicator.

What do they have in common, and why did we decide to test them together?

All these indicators are oscillators meaning that their value always oscillates around some central point (axis). Take a look at the picture:

Accordingly, these indicators generate similar signals. More specifically, they signal an overbought or an oversold state of an asset. Overbought and oversold condition is a reversal trading strategy, i.e. against the trend. But should we trade against the trend?

Now let’s discuss a bit of theory on testing methods.

Don't like theory and take our word for it? If so, go right to the test results.

How and What Will We Test?

Objective: determine the effectiveness of RSI, CCI, and Williams %R indicators.

In the previous study, we focused on various currency pairs. Since most of you trade only EUR/USD, this time we would like to analyze the effectiveness of these indicators on different timeframes of a currency pair in more details.

Range of the study: 2012-2015.
Currency pair: EUR/USD.

Additionally, we conduct tests without taking into account spread and commissions. This enables a more accurate determining the potential of an indicator. If you read our other articles, you will understand why we do so.

Test #1 – Relative Strength Index (RSI)

On its own, this indicator is very popular today, and the basic strategy for its use is to identify overbought/oversold levels.

The value of the RSI indicator always ranges from 0 to 100, and signal to enter a trade is generated when its value is beyond the mark of 70 for selling and 30 for buying.

Description of the strategy under test:

  • Sell when the RSI crosses 70 downwards.
  • Buy when the RSI crosses 30 upwards.
  • Close a trade by a fixed SL/TP (30 points).
  • Period of the indicator: 14.
  • Timeframe: M30.

Results of the test:

Conclusions: Effectiveness of the RSI indicator is 50.96% meaning that only 50.96% of all open trades were winning and 49.04% were losing.

See the results for other timeframes at the end of the article.

Test #2 – Commodity Channel Index (CCI)

The second but no less popular indicator is CCI. It is traded in the same way as the RSI, and only the range within which the indicator oscillates differs.

Description of the strategy under test:

  • Buy when the CCI crosses -100 upwards.
  • Sell when the CCI crosses 100 downwards.
  • Close a trade by a fixed SL/TP (30 points).
  • Period of the indicator: 14.
  • Timeframe: M30.

Results of the test:

Conclusions: The result is the same – 50.96%. Note that the number of trades opened based on the CCI indicator having the same parameters is a lot more than that of the RSI indicator. More market entries produce more noise.

Test #3 – Williams %R

The last indicator we’re going to test is Williams %R that signals overbought/oversold areas as well as the previous two ones.

The range of oscillations is between 0 and -100.

Description of the strategy under test:

  • Buy when the Williams %R crosses -20 upwards.
  • Sell when the Williams %R crosses -80 downwards.
  • Close a deal by a fixed SL/TP (30 points).
  • Period of the indicator: 14.
  • Timeframe: M30.

Results of the test:

Conclusions: The Williams %R indicator showed the result of 49.75% which doesn’t mean that it will always yield losses – the point is that a margin of error was negative.

Summary Table of Results

We will test the indicators for all other timeframes to get a more complete picture.


Проанализируем таблицу:

  • Equity chart trends upwards on small timeframes (M1-M5). Here is an example. However, this growth is most likely related to the reversal effect but not to the performance of the tested indicators on these timeframes.
  • The maximum and minimum values were obtained on the highest timeframes. This doesn’t suggest better signals on these timeframes, but more than likely it is due to a small number of trades (the margin of error has increased).
  • And the last interesting point is as follows: what happens if you enter the market when all the indicators signal at the same time? According to this article, the performance should increase, but that wasn’t the case. Here you can see the result of the tests. This indicates that effectiveness of the indicators is about 50%, because using them as filters is not helpful.

Verdict

Testing the RSI (50.24%), the CCI (51.08%), and the Williams %R (50.28%) indicators showed that these indicators don’t have any profitable potential, and their practical usage is virtually meaningless. For us, they go to the “cemetery of indicators”.

We cannot say that we are surprised by the results. As we have already answered our reader, “We won’t believe it until we see it ourselves”. This way, we will also help you to make sure that these indicators are meaningless.