Sunday, May 15, 2011

optimize the RSI


Let's get this right. All indicators lag. This is essential because they are all calculated from historical prices and there is categorically no argument to say that the price evolves in a linear manner that implies indicators can be used to predict price. I have not found one that provides the market.
Let's take a RSI. Standard in most platforms is the 14th This is because it is considered by Welles Wilder, who created the RSI is a common 28 day cycle of the market and thus an indicator of the half length of the cycle length is a broad measure of use.
If you look back in history to price and apply several different length RSIs over that history, will sometimes find that (for example) 8 period will operate during the harsh oscillating markets, while the wide swinging markets within 14 to work better.
Well, now we have a game plan. We can use an 8 period RSI when the market is choppy and 14 period, when it is ... Now look at your chart and decide what will happen from now. There's always an element of the sentence are included and no way to tell for certain which length to use.
The next argument is to optimize the RSI and meets the most profitable periods. Well, it can be done, but has written systems have not found a parameter that works without significant withdrawal, certainly not one that would care to trade through. In addition, development of a system is not as simple as it seems. What if the optimal period is 14 with a profit of 100, but the parameters of 12, 13, 15 and 16 only have a profit of 25? (This is not an uncommon occurrence.) Do you feel confident that the optimum period was not the only aberration? (In all probability it is.)
So after all that seems to be no safe parameter is used for indicators. Honestly I use the default in most cases - at least for the moment indicators - but the bigger problem here is not an indicator, but how you use it.
Again let's take the RSI. Generally it is commonly used as an overbought / oversold indicator. This is only true during the consolidation of markets, rather than trending. You should never use these types

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