Dynamic RSI
Momentum
An RSI with moving rather than fixed thresholds. Instead of always using 30 and 70, the boundaries are computed from the recent spread of the RSI itself.
Construction & calculation
- Compute the plain RSI(14).
- Take its average over the last 20 values and its standard deviation.
- The overbought band = that average + 2 standard deviations; the oversold band = the average - 2 standard deviations.
- The bands thus breathe with the character of the stock: a calm stock gets narrow bands, a volatile stock wide ones.
center = SMA(RSI, 20)
OB band = center + 2 x stdev(RSI, 20)
OS band = center - 2 x stdev(RSI, 20)
Interpretation
- The advantage over the classic RSI: in a strong uptrend the bands shift up with it, so you don't get a false sell signal every week.
- A crossing back into the band is the actual signal: the extreme is digested and momentum is turning.
- If the RSI keeps sticking outside the band, the trend is exceptionally strong.
How the signal works in this scanner
Buy signal (green)The RSI crosses the oversold band from below to above within the last 3 bars (it leaves the extreme lower zone).
Sell signal (red)The RSI crosses the overbought band from above to below.
Watch-outs & pitfalls
- On a sudden volatility burst the bands widen and no signals appear for a while.
- Requires at least 36 trading days of data (14 for the RSI + 20 for the bands).