V.4:7 (275-277): The relative strength quality factor by Donald Jones and Tod Stromquist
Product Description
The relative strength quality factor by Donald Jones and Tod Stromquist
The relative strength index (RSI), as popularized by J. Welles Wilder in his book and later by a chart service, is possibly the most widely used technical indicator in futures trading. An oscillator, the RSI can take values from zero to l00, with 50 being the neutral, or most expected value. As suggested by Wilder and generally used, an RSI of 70 or more indicates an overbought (OB) market; 30 or less is oversold (OS). Consequently, the real action, i.e., the OB/OS areas, tends to be crammed into limited regions. Experience has shown that for many less volatile contracts the 70+ and 30-regions are rarely visited by the RSI, even when the contract is active.
This relative insensitivity of the standard RSI can be eased by adapting it to a more market-oriented view. We developed a "quality factor" (QL) by tying the RSI to each individual future. The QL is based on the life-of-contract historical average of that particular future's RSI rather than on some arbitrary value like 70. This article will show the QL to be more sensitive, less limited in its extension and as easy to calculate as the RSI itself.
The relative strength index (RSI), as popularized by J. Welles Wilder in his book and later by a chart service, is possibly the most widely used technical indicator in futures trading. An oscillator, the RSI can take values from zero to l00, with 50 being the neutral, or most expected value. As suggested by Wilder and generally used, an RSI of 70 or more indicates an overbought (OB) market; 30 or less is oversold (OS). Consequently, the real action, i.e., the OB/OS areas, tends to be crammed into limited regions. Experience has shown that for many less volatile contracts the 70+ and 30-regions are rarely visited by the RSI, even when the contract is active.
This relative insensitivity of the standard RSI can be eased by adapting it to a more market-oriented view. We developed a "quality factor" (QL) by tying the RSI to each individual future. The QL is based on the life-of-contract historical average of that particular future's RSI rather than on some arbitrary value like 70. This article will show the QL to be more sensitive, less limited in its extension and as easy to calculate as the RSI itself.
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