The DVI is somewhat of an unknown indicator that was briefy touched upon sometime ago on the blog. Essentially the DVI is like the DVO of intermediate oscillators and was designed to take both 1) the magnitude of returns over different time windows smoothed and 2)the stretch–or the relative number of up versus down days into account over different time windows to produce superior results. Unlike the Super-Smoothed Double Stochastic -DVDS (which visually doesn’t appear smooth at all), the DVI is a very smooth momentum oscillator that can also be used as a trend indicator as well. The versatility of the DVI is what makes it unique and it often gives both uncorrelated and longer signals relative to the DV2/DVSC/DVO and the Double Stochastic. The fact that the signals are smoother allows you to combine trend-following methods with mean-reversion without having to make too many trades to adjust. In contrast, doing that with the Stochastic or the DVO/DVSC or DV2 would create tons of trades and not neccessarily find the right points. The DVI is superior at identifying overbought levels above the 200ma for example and therefore gives you solid points to exit into strength and potentially even short—-yes short—above the 200ma. One can construct a simple system that buys above the 200ma and sells when the DVI>.5, and short below the 200ma and cover when the DVI<.5. This system would be simple and easy to implement without having to feverishly check your quotes every day. The edge for the next day is much smaller for example for the DVI versus say extreme levels of the DVDS. However, the annualized return is actually higher for the DVI vs the DVDS. Using both in combination, and especially with the DV2 can help you improve your entries and exits. Below is a summary table of the performance of the DVI:
|Performance Using DVI Indicator (3000 bars)|
|CAGR (3000 bars)||CAGR (2009)|
|Long Only<50 exit>50||12.30%||33%|
|Short Only >50 exit< 50||9.10%||6%|
In the next post we will look at how to create some strategies with the DVI and some other applications such as momentum-based strategies, and also creating a composite indicator with the DV2/DVSC/DVO, and DVDS.