Jump to content

Welcome to the new Traders Laboratory! Please bear with us as we finish the migration over the next few days. If you find any issues, want to leave feedback, get in touch with us, or offer suggestions please post to the Support forum here.

  • Welcome Guests

    Welcome. You are currently viewing the forum as a guest which does not give you access to all the great features at Traders Laboratory such as interacting with members, access to all forums, downloading attachments, and eligibility to win free giveaways. Registration is fast, simple and absolutely free. Create a FREE Traders Laboratory account here.

Do Or Die

Trading Regime Analysis Using RSI

Recommended Posts

Hi,

 

This article is a build up on the previous one- Trend Following Vs Mean Reversion: Trading Regimes. I will now try to clarify the meaning of Trading Regimes using RSI as an example, before we move to more sophisticated methods. This is a discretionary method, but conceptually strong, and can serve as an intro to quantitative methods. We will gradually shift to the crux, "Big moves are often preceded by contraction,and followed by expansion in volatility, this works across all time frames." There is also significant academic research on regime shifting, and you can find papers on SSRN. Two other relevant links are Relative Strength - Internal and Introduction to Understanding Volatility

 

Most trading strategies can be categorized into two different camps: Trend Following and Mean Reverting.

 

An example of trend following is buying when prices cross above a moving average. For trend following systems or strategies, simply buying and holding the market has it's benefits. First and foremost - It's simple and when markets catch a trend, it can run and run. However, Trend following relies on directional moves. Your strategy will lose if the market is sideways; and, the markets CAN remain in a sideways mode until you go bonkers. You can make a trend following strategy howsoever complicated using MACD, ADX, Parabolic SAR. But if the strategy is "trend following" it will not perform in sideways market.

attachment.php?attachmentid=25457&stc=1&d=1311727988

An example of mean reverting will be- buying when a oscillator tuns upwards from a oversold stage. Mean reverting strategies relies on the assumption that market cannot continue in one direction for prolonged time; it will "revert" back to a theoretical mean. The "mean" is always shifting ofcourse. The moving average is a good example of a mean around which prices move around. Trading using price bands (eg. bollinger bands) and channels is also an example of a mean reverting strategy. These strategies lose money in trending markets.

attachment.php?attachmentid=25456&stc=1&d=1311727988

The aim of these articles is to establish a method of switching between strategies as they blow hot and cold, so you don't continue to follow the strategies that aren't adapting to current market conditions.

Shifting Strategies using RSI

 

  • A sharp and extended move to either the overbought or oversold area signifies the start of a directional move. Refer to Mega Overbought stage at Relative Strength - Internal. The opposite conditions qualify for a Mega Oversold stage which indicates the start of a new downtrend.
  • An uptrend is marked by the fact that RSI will not reach the lower parts of its range. RSI typically moves in the range >40 in an uptrend while touching >70 area often.
  • A downtrend is marked by RSI does not reaches the upper part of its range. In a downtrend it will tend to remain below 60 and move toward <30 area often.
  • A sideways trend is marked by RSI moving >70 and <30 area.

 

When the market is trending, the Moving Average Crossover with price is used to generate signals. When the market is sideways, the oscillator turning up (down) from a oversold (overbought) stage is used to generate signals.

 

attachment.php?attachmentid=25458&stc=1&d=1311727988

 

Note the period where all signals are discarded, whether they come from a trend following or a mean reverting method. This is because the regime shift is not clear, as per the definition above. From a historical perspective it looks more like a sideways market and should have given money from a mean reverting strategy.

 

The improvement by switching strategies should be very apparent in this example. The productivity of your trading system/methodology can improve dramatically by including a 'regime analysis' or 'adaptive layer' on top of strategies. I currently use a custom indicator for regime analysis, however, it can be achieved through many techniques.

 

Please post a comment- they encourage me to provide better examples.

trending.thumb.png.60767aba36f53488258e9410ea5fe1f5.png

sideways.thumb.png.1df2fa87a8c911b17fe718ee646c0287.png

5aa7109136e0a_tradingregime.thumb.png.2463cefa7baed8bf7a485994629ac0b8.png

Share this post


Link to post
Share on other sites

Hi Do or Die,

 

Thank you for the thread. I will also follow along and I know I'll learn a lot.

 

Please post a comment- they encourage me to provide better examples.

 

Which method do you think would be more successful? Do you think it would be more successful to keep it simple and just use the RSI or are there better indicators to use for mean reversion? Also do you recommend this for a beginner trader like myself?

 

Thank you again for the thread.

Share this post


Link to post
Share on other sites

Which method do you think would be more successful? Do you think it would be more successful to keep it simple and just use the RSI or are there better indicators to use for mean reversion? Also do you recommend this for a beginner trader like myself?

 

Hi Umfan,

 

As I previously mentioned, for beginner traders it is good to understand one technique/indicator before moving to another.

 

The other day I was discussing with Phantom about divergences- most oscillators behave in same way. You do not need to research each of them to learn about trading overbot/oversold levels. Studying one will be sufficient. You can stick to only one (say RSI) http://www.traderslaboratory.com/forums/technical-analysis/10120-relative-strength-internal.html Once you are fully comfortable with it, you can tweak them to suit your trading style (example Trading Regime Analysis Using RWI

Share this post


Link to post
Share on other sites

This looks to be interesting and one look forward to the more sophisticated techniques in identifying "regime change".

 

However on the basis of the examples that you gave, it seems that it identifying a trend is easier than identifying a mean reverting period objectively. Visually it may be quite easy. Bouncing off the +70 and the -30 range is not easily identifiable. Or by the time you identify it, the regime has played itself out.

 

Waiting to see the "pure technical analysis" way of identifying a side-wise moving regime from you, instead of the techniques like co-integration etc which are more in the realm of statistical arbitrage.

 

Jose Kollamkulam.

Chennai

Share this post


Link to post
Share on other sites
...

However on the basis of the examples that you gave, it seems that it identifying a trend is easier than identifying a mean reverting period objectively. Visually it may be quite easy. Bouncing off the +70 and the -30 range is not easily identifiable. Or by the time you identify it, the regime has played itself out.

This is a discretionary method... and like all other discretionary pattern methods it can be subject to hindsight bias and availability heuristics. This method will be helpful to only traders who use RSI regularly in their trading. (refer Relative Strength - Internal )

 

Similarly for people who trade using chart patterns will be able to better relate Trading Regime Analysis Using Chart Patterns- Part 1 and Part 2.

 

If you're using any of techniques talked about on internet (versus using custom indicators), and wish to tell me about it, I can give a better contextual reply.

Share this post


Link to post
Share on other sites

During bull markets, all indicators tend to trade with a bias to the high end of the range, while in bear markets indicators tend to shift to new, lower extremes. This is what I call indicator scale shift, and where truly major market moves are involved, it will happen.

 

In addition to gauges of breadth and volume, we also see the scale shift phenomenon at work in more classic gauges like the nine-day Wilder Relative Strength Index (RSI), which is a common momentum gauge. The classic RSI scale suggests that values above +70 are overbought and readings below +30 are oversold. In reality, in strong uptrending bull market moves, the nine-day RSI will often move up to record readings in the +80 area and end up a subsequent correction in the low +40 zone. This upward scale shift away from the traditional +70 and +30, to +80 and +40 parameters, is the bull market “80/40” rule for the nine-day RSI. Alternatively, in bear markets, we often experience a downward scale shift to parameters of +60 overbought and +20 oversold. This is the bear market “60/20” rule for the nine-day RSI.

 

--- Frank Barbera

Share this post


Link to post
Share on other sites
Visually it may be quite easy. Bouncing off the +70 and the -30 range is not easily identifiable. Or by the time you identify it, the regime has played itself out.

 

Its rather easier to code the same thing without any future looking formula; I just did. Compare the char above with the one posted in first post. Works satisfactory even with a lag of 50 bars; though I would prefer going discretionary with this method.

Edited by Do Or Die

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.


  • Topics

  • Posts

    • Agreed since some of the new traders usually lose money in start and some loses more while chasing their lost money and eventually ends up blaming to their brokers part.
    • The crypto market are also in phase of maturing like the forex and other trading assets so we can do much more accurate analysis than before since early days it was purely a luck if the investments in crypto bears results because most of the coins or tokens never come to fruition. Some early birds were also able to make profits on these tokens or coins. e,g., like turtle coin starts with 1 satoshi and go up to 7 sathoshis, quite good rewards. another token lmgx now hovering at 10 started from 1, 
    • How's about other crypto exchanges? Are all they banned in your country or only Binance?
    • Be careful who you blame.   I can tell you one thing for sure.   Effective traders don’t blame others when things start to go wrong.   You can hang onto your tendency to play the victim, or the martyr… but if you want to achieve in trading, you have to be prepared to take responsibility.   People assign reasons to outcomes, whether based on internal or external factors.   When traders face losses, it's common for them to blame bad luck, poor advice, or other external factors, rather than reflecting on their own personal attributes like arrogance, fear, or greed.   This is a challenging lesson to grasp in your trading journey, but one that holds immense value.   This is called attribution theory. Taking responsibility for your actions is the key to improving your trading skills. Pause and ask yourself - What role did I play in my financial decisions?   After all, you were the one who listened to that source, and decided to act on that trade based on the rumour. Attributing results solely to external circumstances is what is known as having an ‘external locus of control’.   It's a concept coined by psychologist Julian Rotter in 1954. A trader with an external locus of control might say, "I made a profit because the markets are currently favourable."   Instead, strive to develop an "internal locus of control" and take ownership of your actions.   Assume that all trading results are within your realm of responsibility and actively seek ways to improve your own behaviour.   This is the fastest route to enhancing your trading abilities. A trader with an internal locus of control might proudly state, "My equity curve is rising because I am a disciplined trader who faithfully follows my trading plan." Author: Louise Bedford Source: https://www.tradinggame.com.au/
    • SELF IMPROVEMENT.   The whole self-help industry began when Dale Carnegie published How to Win Friends and Influence People in 1936. Then came other classics like Think And Grow Rich by Napoleon Hill, Awaken the Giant Within by Tony Robbins toward the end of the century.   Today, teaching people how to improve themselves is a business. A pure ruthless business where some people sell utter bullshit.   There are broke Instagrammers and YouTubers with literally no solid background teaching men how to be attractive to women, how to begin a start-up, how to become successful — most of these guys speaking nothing more than hollow motivational words and cliche stuff. They waste your time. Some of these people who present themselves as hugely successful also give talks and write books.   There are so many books on financial advice, self-improvement, love, etc and some people actually try to read them. They are a waste of time, mostly.   When you start reading a dozen books on finance you realize that they all say the same stuff.   You are not going to live forever in the learning phase. Don't procrastinate by reading bull-shit or the same good knowledge in 10 books. What we ought to do is choose wisely.   Yes. A good book can change your life, given you do what it asks you to do.   All the books I have named up to now are worthy of reading. Tim Ferriss, Simon Sinek, Robert Greene — these guys are worthy of reading. These guys teach what others don't. Their books are unique and actually, come from relevant and successful people.   When Richard Branson writes a book about entrepreneurship, go read it. Every line in that book is said by one of the greatest entrepreneurs of our time.   When a Chinese millionaire( he claims to be) Youtuber who releases a video titled “Why reading books keeps you broke” and a year later another one “My recommendation of books for grand success” you should be wise to tell him to jump from Victoria Falls.   These self-improvement gurus sell you delusions.   They say they have those little tricks that only they know that if you use, everything in your life will be perfect. Those little tricks. We are just “making of a to-do-list before sleeping” away from becoming the next Bill Gates.   There are no little tricks.   There is no success-mantra.   Self-improvement is a trap for 99% of the people. You can't do that unless you are very, very strong.   If you are looking for easy ways, you will only keep wasting your time forgetting that your time on this planet is limited, as alive humans that is.   Also, I feel that people who claim to read like a book a day or promote it are idiots. You retain nothing. When you do read a good book, you read slow, sometimes a whole paragraph, again and again, dwelling on it, trying to internalize its knowledge. You try to understand. You think. It takes time.   It's better to read a good book 10 times than 1000 stupid ones.   So be choosy. Read from the guys who actually know something, not some wannabe ‘influencers’.   Edit: Think And Grow Rich was written as a result of a project assigned to Napoleon Hill by Andrew Carnegie(the 2nd richest man in recent history). He was asked to study the most successful people on the planet and document which characteristics made them great. He did extensive work in studying hundreds of the most successful people of that time. The result was that little book.   Nowadays some people just study Instagram algorithms and think of themselves as a Dale Carnegie or Anthony Robbins. By Nupur Nishant, Quora Profits from free accurate cryptos signals: https://www.predictmag.com/    
×
×
  • Create New...

Important Information

By using this site, you agree to our Terms of Use.