Optimizing RSI with cycles by John F. Ehlers
A look at Wilder's Relative Strength Index oscillator and an optimization using cycles. Also included is a BASIC computer program which follows the author's optimization processes.
As an engineer I have often been puzzled by some of the terms used by investors. One example is the
use of "oscillators" to form trading signals. I have always thought that an oscillator was a device that
generated cycles. This caused my initial attraction to such indicators. I quickly learned that a trading
oscillator had nothing to do with cycles.
Used in the trading context, an oscillator is the difference in price (or volume or open interest) on two
separate days. If we create an oscillator for adjacent days, we have the discrete approximation to the
derivative of the price function. I won't burden you with the differential calculus here, but the derivative
of a sine wave (its rate of change, or "momentum") is a cosine wave. This is interesting because the phase
of the cosine wave leads the phase of the sine wave by 90 degrees.