Tuesday, August 17, 2010

The RSI as an entry signal

Our reader wants to know how to plot the LBR RSI in Trend Analyzer. This is easy to do. Since the concept was interesting, I am discussing it in the blog.

What is the LBR RSI?

This is used in a  method called 'Momentum Pinball' discussed in the Raschke and Connors book, Streetsmarts. The method calculates a 3 period RSI of a one day ROC. When the RSI falls below 30 in an end of day chart, a buy signal is triggered. Buying is done the next day when the first hour high is crossed. A sell signal is triggered when the RSI goes above 70. Again, actual selling is done below the low of the first hour, the next day.

How to calculate this in Trend Analyzer?
1. Insert Indicator: Rate of Change
2. Values: Period1 = 1, Period2 = 1, Extreme High = 70, Mid Point = 50, Extreme Low = 30
3. Click on Advanced: click on RSI and change period to 3.
4. In the visibility option, you may like to turn off the mid point which is 50, because that is not used.

Here is a chart of the Bank Nifty with the Indicator:



Like most setups, this is is best used in the direction of the trend. This is my thought, not from the book. But going with the trend is usually the most sensible way to trade.

Another option is to use 3RSI3, which is the 3 period simple MA of a 3 period RSI. (In Trend Analyser this is easy to create. Insert the RSI indicator, Period=3, Smooth=3. Change the Extreme High and Extreme low to 70 and 30.

Here is the BankNifty chart with this indicator:


1 comment:

kk said...

RESPECTED SIR

EVERYBODY IN THIS MARKET IS WAITING FOR A DIP FOR THE LAST 5 WEEKS , BUT MARKET SEEMS TO BE QUITE BUSY IN CHURNING ITSELF.

THERE IS BEEN A NEW AVATAR IN THE AUTO SECTOR , !!TATA MOTORS!! , TO TAKE THE INDEX HIGHER.

PSU BANKS CONTINUE THEIR MARCH , AHEAD OF PRIVATE BANKS.

OIL EXPLORATIONS HAVE BEEN BADLY REPLACED BY THE MARKETING ONES.THAT'S THE MAIN REASON I SEE FOR RELIANCE UNDER PERFORMANCE.

ON THE CAPITAL GOODS FRONT , MARKETS HAVE TAUGHT US THAT, ONLY GOOD TALKS CAN'T STIMULATE GOOD STOCK PRICES, IT'S ONLY GOOD NUMBERS!!. I AM QUITE CONFIDENT THAT THIS WILL BE THE FIRST SECTOR TO LEAD US IN THE DOWNSIDE.

HIGH BETAS HAVE BEEN REPLACED BY HIGH BETAS. METALS ON THE DOWNSIDE , AND REALTY ON THE UPSIDE.

THAT'A MY VIEW , I WOULD THANKFUL , IF YOU CORRECTS ME.