Does the RSI(2) strategy work on forex?

Key results

Total return

-4.5%

Buy & hold: +0.1%

Annual return (CAGR)

-0.5%

Buy & hold: 0%

Max drawdown

-6.6%

Buy & hold: -23.3%

Win rate

54.67%

Profit factor

0.78

Trades

75

Longest losing streak

5 trades

Period

Oct 2, 2016 to Oct 1, 2026

10 years

Market

EUR/USD

Daily

Equity curve vs buy & hold

Returns year by year

Calendar years, compounded from monthly results. The first and last years can be partial.

Larry Connors designed RSI(2) for stocks and stock indices: buy a sharp pullback when the price is above its 200-day average, sell short a sharp rally when it is below. We built it from the rules described in StockCharts' ChartSchool. EUR/USD is a deliberate change of terrain. A major currency pair has no long-term drift, so the 200-day filter should carry real information in both directions instead of acting as a permanent buy permission. If RSI(2) is a general edge rather than a property of rising stock markets, this is where it should show.

The rules we tested

• Market and period: EUR/USD, daily candles, October 2016 to October 2026.
• Long entry: RSI(2) below 5 and the close above the 200-day simple moving average (SMA).
• Long exit: the close is back above the 5-day SMA, or below the 200-day SMA.
• Short entry: RSI(2) above 95 and the close below the 200-day SMA.
• Short exit: the close is below the 5-day SMA, or back above the 200-day SMA.
• Stop and target: a 400-pip protective stop-loss, never hit (every trade closed on the moving-average rules), and no take-profit.
• Sizing and costs: 100% of equity per trade, 0.02% commission per side, $10,000 starting capital.

What the backtest shows

The win rate drops to 54.7%, far below the 66 to 75% the same rules reached on stock indices. The payoff stays poor: the average win was 0.41% and the average loss 0.62%, so breaking even would need about 60% winners. The result is a profit factor of 0.78 and -4.5% over ten years, with up to 5 losses in a row.

The moves are small. An average win of 0.41% means the round-trip commission (about 0.04% of the position) eats close to a tenth of each winning trade. The low drawdown, 6.6% against 23.3% for holding the pair, is not a sign of safety either: it comes from small daily moves and few days in the market.

Only three calendar years ended positive: 2019 (+0.8%), 2022 (+4.8%) and 2023 (flat at +0.04%). 2022 was the year of a strong dollar trend, when the pair spent long stretches below its 200-day average, where only the short rules can trade. The worst year was 2021 (-2.4%, 1 winner out of 6 trades).

On stock indices the identical rules were positive: +26.9% on the Nasdaq 100, +18.1% on the S&P 500 and +14.4% on the DAX.

Why it doesn't work here

RSI(2) on indices profits from two things at once: short-term mean reversion and a long-term upward drift that keeps rewarding dip buyers. EUR/USD offers the first in small amounts and lacks the second entirely. A daily RSI(2) below 5 on a currency pair often reflects a move that does not snap back within a few days, and the exit at the 5-day average then closes the trade at a loss. That is a measured result on one pair and one timeframe, not a verdict on mean reversion in forex as a whole.

What you could test next

• Keep only the side that agrees with a longer trend, for example longs only above a rising 200-day SMA.
• Tighten the entry to RSI(2) below 2 (and above 98 for shorts) to take only extreme moves.
• Test a pair with more short-term swing, such as GBP/USD, or a cross like EUR/GBP.
• Replace the 5-day SMA exit with a fixed number of candles.

Methodology and assumptions

Frequently asked questions

Reproduce it, then change it

Every number on this page comes from the Backtrex engine. Rebuild the strategy in the app, then change the market, the timeframe or a parameter and see whether the result holds.

Other backtests