Technical Indicators: R (part 1)
R-Squared
The R-Squared or R2 indicator illustrates how well the Linear Regression Trendline approximates real data points. An R-Squared of 1.0 indicates a perfect fit.
If the R-Squared indicator falls below the critical values shown below, it would illustrate no correlation between the price and the Linear Regression Trendline.
Number of Periods | R-Squared Critical Value
(95% confidence)
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5 |
.77
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10 |
.40
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14 |
.27
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20 |
.20
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25 |
.16
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30 |
.13
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50 |
.08
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60 |
.06
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120 |
.03
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You may even consider opening a Short-term position opposite the
prevailing trend when you observe r-squared rounding off at extreme levels. For
example, if the slope is positive AND r-squared is above 0.80 then begins to
turn down, you may consider selling or opening A Short position. There are
numerous ways to use the linear regression outputs of r-squared and Slope in
trading systems. For more detailed coverage, refer to the book The New
Technical Trader by Tushar Chande and Stanley Kroll.
Random Walk Index
The Random Walk Index was created by Michael Poulos who wanted to find an indicator that overcame the effects of a fixed look-back period as well as the drawbacks of traditional smoothing methods. The RWI is based upon the concept of the shortest distance between two points is a straight line. The further prices stray from that straight line within a given time, the less efficient the movement. The more random the movement, the greater the RWI fluctuates.
To effectively use the RWI, Poulos recommends 2 to 7 periods for the short term and 8 to 64 periods for the long term. This is to illustrate the randomness of the short term and the trends of the long term. In the short term, peaks of RWI highs correlate with peaks in price. Peaks of RWI lows correlate with drops in price.
In the long term, peaks of RWI highs above 1.0 illustrate a strong uptrend. Peaks of RWI lows above 1.0 illustrate a strong downtrend.
A trading system using this index would be enter long (or close short) when the long-term RWI of highs is greater than 0 and short term RWI of lows rises above1.0. Likewise, when the long-term RWI of the lows is greater than 1.0 and the short-term RWI of highs rises above 1.0, enter short (or close long).
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Range Indicator
Developed by Jack Weinberg, the Range Indicator is based on his observation that changes in the average day's intraday range (high to low) as compared to the average day's interday range (close to close) will either signal a start of a new trend or the end of an existing trend.
When the intraday ranges are dramatically higher than the interday ranges, the market is considered "out of balance," and the Range Indicator will be at a high level. Look for the current trend to end when this happens. When the Range Indicator is at a low level (below 20), look for the emergence of a new trend.
The Range Indicator can be used to improve many momentum and trend-following trading systems. Weinberg found that the results of a basic two moving average crossover system was dramatically improved by filtering the signals with the Range Indicator. By waiting to enter a long position until the Range Indicator crossed above a defined low level and then waiting to exit until the indicator crossed above a defined high level, profits, number of trades, and risk were dramatically improved.
Range Expansion Index
The DeMark Range Expansion Index is a market-timing oscillator described in DeMark on Day Trading Options, by T.R. DeMark and T.R. Demark, Jr., McGraw Hill, 1999. The oscillator is arithmetically calculated and is designed to overcome problems with exponentially calculated oscillators, like MACD. The TD REI oscillator typically produces values of -100 to +100 with 45 or higher indicating overbought conditions and -45 or lower indicating oversold.
Here is how Tom DeMark describes the calculation of Range Expansion Index:
"The first step in calculating the REI is to add together the respective differences between the current day's high and the high two days earlier and the current day's low and the low two days earlier. These values will be positive or negative depending on whether the current day's high and low are greater or less than the high and low two days earlier. To prevent buying or selling prematurely into a steep price decline or advance, two additional conditions should be met to qualify a positive or negative value on a particular day:
1) either the high two days earlier must be greater than or equal to the close seven or eight days ago, or the current day's high must be greater than or equal to the low five or six days ago;
2) either the low two days earlier must be less than or equal to the close seven or eight days ago, or the current day's low must be less than or equal to the high five or six days ago. If either of these conditions are not satisfied, a zero value is assigned to that day.
If they both are, the daily values (the differences between the highs and lows) are summed , and the specific value for that next day is determined. Next, all the positives and negative values are added together over a five-day period. This value is then divided by the absolute value price movement of each day over the five-day period. The numerator of the calculation can be either positive, negative or zero, because each day's value is summed for five days, but the denominator is always positive because it is only concerned with the differential price movement itself. This value is then multiplied by 100. Consequently, the REI can fluctuate between +100 and -100."
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