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Converting the RSI into a Trend-Following Indicator (DVTrsi)

September 30, 2009

A little known fact is that the RSI14 can be converted into an effective trend following indicator using re-scaling. The concept is based on the observation that in bull markets, the RSI14 rarely if ever gets below 30 (oversold) and but it frequently exceeds 70 (overbought). The reverse is true with bear markets, where the RSI 14 is frequently below 30, often before a big plunge, yet it almost never gets above  70. As a result, when the market diverges and spends a lot of time in overbought territory in bear markets, or in oversold territory in bull markets–a trend reversal is likely underway. My technique for accomplishing this re-scaling process is much different than say the PID Oscillator (see Technical Analysis of Stocks and Commodities Magazine). In this case I do not make any assumptions about what constitutes oversold or overbought in various markets. I focus on the core concept itself—persistent overbought conditions as identified mechanically using a lookback period should indicate the presence of a bull market or vice versa. The resulting indicator outperforms the vast majority of standard trend-following indicators on the S&P500.

to be continued…………

One Comment leave one →
  1. Bill permalink
    October 1, 2009 11:37 pm

    David,

    do you mind posting some excel calculation for GAMDO and DVTRsi

    thanks
    Bill

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