New Tricks With Old Indicators by Jay Kaeppel
Recycle, Reuse, Repurpose
Traders are always looking for ways to refine their tools.
Here, weíll reshape and redesign two familiar, classic
indicators. The result is something new that could improve
your ability to identify oversold buying opportunities.
The more things change, the more they stay the same. Nothing
new under the sun. You canít teach an old dog new
tricks. All of these well-worn phrases have become well
worn because they each contain an element of truth. Still,
the desire to innovate and create new and more useful tools
is simply part of human nature. This is especially true when
it comes to attempting to refine tools to aide us in becoming
more successful investors and traders.
Two indicators that have been around for a long time and that are widely used to identify overbought & oversold opportunities
are the relative strength index (RSI) and the CBOE
Volatility Index (VIX). The original RSI was developed by J.
Welles Wilder in the 1970s and can be used on any security.
The original VIX was created by the CBOE using options on
the ticker OEX. A number of years back, the calculation was
changed to use options on the much more heavily traded ticker
SPX (index options that track the S&P 500 index).
Letís take these two original indicators and bend them in
some new directions to create two new indicators that, when
used in conjunction, may help improve a traderís ability to
identify oversold buying opportunities.
The basic calculations (RSI and VIX)
Letís look first at the 14-day RSI created by Wilder so many
years ago. The standard formula for calculating a daily RSI value is as follows: