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20-Year Study: RSI for Trend-Following and Momentum
Most traders think they know RSI. Buy when it falls below 30 and sell when it rises above 70. That idea has been around for decades, yet a comprehensive 20 year study suggests the indicator may be far more valuable when used in exactly the opposite way.
Rather than treating RSI as a reversal tool, Arthur Hill tested whether it could identify stocks already showing persistent trends and strong momentum. The results suggest that this approach deserves far more attention.
Five RSI Tests Across Twenty Years
The study examined every stock in the S&P 500 over a twenty year period from 1998 through 2018, using historical index constituents to avoid survivorship bias. Instead of testing a single RSI rule, Hill compared five different concepts:
RSI Bull Range
RSI Bear Range
RSI Bull Momentum
RSI Bear Momentum
RSI Bull Range plus Momentum
The Bull Range test identified stocks whose 14 day RSI remained above 40 for an extended period. The idea is simple. Strong uptrends should experience pullbacks, but those pullbacks should not be severe enough to push RSI below 40.
The Bull Momentum test looked for stocks where RSI regularly exceeded 70. Rather than viewing overbought readings as bearish, the study treated them as evidence of exceptional upside momentum.
Finally, the author combined both conditions. Stocks had to maintain an RSI above 40 while also regularly pushing above 70. This created a filter for companies showing both trend consistency and strong momentum.
The Combination Produced the Strongest Results
The Bull Range strategy generated excellent profit to loss ratios above 2 across all lookback periods. However, its success rate remained below 40%, meaning the winners were much larger than the losers, but they occurred less frequently.
The Bull Momentum strategy told a different story. Success rates improved to between 52% and 58%, showing that stocks making repeated RSI moves above 70 were more likely to continue advancing. Profit to loss ratios were lower than the Bull Range test, but still improved as the lookback period became longer.
The most compelling results came when both RSI trend consistency and momentum were required at the same time.
The table below shows the results of the combined Bull Range and Bull Momentum test. One pattern stands out immediately: performance improved consistently as the lookback period became longer.
The improvement is clear. The 75-day signal was the first to exceed both a 50% success rate and a profit/loss ratio above 2. Results continued to improve at the 100-day and 125-day lookback periods, with the longest test producing a 58% success rate, a 32.01% average advance, and the highest profit/loss ratio of 2.40.
The study challenges one of the most common interpretations of RSI. Instead of treating high RSI readings as automatic sell signals, they may be better viewed as evidence of persistent strength. According to Hill's testing, the best opportunities came from stocks that combined consistent trends with repeated momentum bursts over several months.
For traders, this changes how overbought readings should be interpreted. An RSI above 70 does not automatically mean a stock is ready to reverse. In many cases, it identifies the market's strongest momentum leaders. When those momentum readings are paired with an RSI that consistently holds above 40 during pullbacks, the historical evidence becomes considerably stronger.
The study concludes that this combination can identify stocks with persistent trends and strong momentum, particularly when evaluated over longer periods of roughly three and a half to six months.
Source: Arthur Hill, CMT, "Finding Consistent Trends with Strong Momentum: RSI for Trend-Following and Momentum Strategies" .
