March 25, 2017: New comments S&P500
Want to know more about "Capturing Profit with Technical Analysis"?
Twice semi-finalist "Favorite Article" in the S&C 2015 Readers' Choice Award. Thank You!
AXIOM business books awards, bronze medal for my book! Thank You!
The Relative Strength Index (RSI) was developed by J. Welles Wilder and published in Commodities magazine in June 1978 and in his “New Concepts in Technical Trading Systems” the same year.
The RSI is a momentum indicator measuring the speed at which a security's price is changing. Early signaling for entry and exit points is the main advantage of this leading indicator.
One of the most valuable ways utilizing the RSI is to watch for divergences with price. A divergence describes a situation when the trend of the oscillator moves in a different direction from the prevailing price trend.
Looking for a way to have as much as possible reliable divergence signals, I was thinking of using a smaller average in the creation of the RSI oscillator. The original RSI uses the same RSI averaging period both for the up closing and down closing bars. However, to me, more logical would be using the number of up bars for averaging the up closing and the number of down bars for averaging the down closing bars in the selected RSI period. So, I am using a dynamically changing average to get more reliable divergences compared to the standard RSI.
This is the formula:
Period:=Input("ARSI Time Period ->",1,100,14);
To be able to use this formula, you need the external "forum.dll" file that has a function for a dynamic moving average. You can find this file on the Equis forum http://forum.equis.com/. Please make sure reading the CopyRight notice.
The most valuable way utilizing ARSI is to watch for divergences with price. A divergence describes a situation when the trend of the oscillator moves in a different direction from the prevailing price trend.
When the oscillator creates a higher bottom while the price makes a lower bottom, they diverge. This is mostly found at the end of a downtrend, indicating an uptrend reversal.
When the oscillator creates a lower top while the price makes a higher top, they diverge. This is mostly found at the end of an uptrend, indicating a downtrend reversal. These divergences are commonly known as normal divergences.
When the oscillator makes a lower bottom while price sets a higher bottom, they diverge. This is mostly found in a price uptrend after a temporary price correction, indicating a continuation of the previous uptrend.
When the oscillator has a higher top while price sets a lower top, they diverge. This is mostly found in a price downtrend after a temporary price up correction, indicating a continuation of the previous downtrend. We call these last two reverse or hidden divergences.