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Volume Weighted Relative Strength Index Volume Weighted Relative Strength Index RussellR. Minor. CMT Introduction M’here “RS is the ratio of the exponen- Z is the current period’s closing price. tiall! smoothed moving average of n- peri- Zp is the previous period’s closing price. In this pa/w I proposr to examiw the On ods gains divided by the absolute value Balanre lblrtm~ (OBI’) in the&lalive Stree,l,gth (i.e., ignoring sign) of the exponentiall! C-Cpl is the absolute vAue of the differ- Index (RTI) format, rind to rwafr n \hlutnf~ smoothed moving average of n- period ence between the two closing prices. Wighted Relative StnnRfh Index (IWRSI). losses.” ’ The RSI is then plotted on a ver- b7is the current period’s volume. The first principle that must be fully ex- tical scale from zero to one hmidred. As plained and understood is that an oscilla- originally defined (11 days for n), move- “The total volume for each clay is as- tor. either price or volume derived, is sub ments of the RSI above 70 are considered ;igned a plus or minus value depending ordinate to a basic trend analysis. “A trend to be overbought, and movements below m whether prices close higher or lower is a time measurement of the direction in 30 identify an oversold condition. It usu- for that day. X higher close causes the vol- price levels covering different time spans. ally pays to wait for the RSI to exit or enter time for that day to be given a plus value, There are many trends, but the three that the overbought/oversold region. “Xn! bvhile a lover close counts for negative are most widely followed are primary, sec- strong trend, either up or down, usuall! value. X running cumulative total is then ondary, and short-term.” ’ There is no produces an extreme oscillator reading maintained b? adding or subtracting each universal law governing the time frame before too long. In such cases, claims that day’s volume based on the direction of the which these three trends must follow. a market is overbought or oversold are market close.” ’ The level of the OB\’ line There is a tendency for certain time peri- usually premature, and can lead to an earl!- is not important, rather the direction of ods to be more common than others: exit from a profitable trend. In strong the OB\’ line itself. The theory behind “Dow Theory for example, classifies the uptrends, overbought markets can sta! the OBY line is that volume activity should primary trend as being in effect for longer overbought for some time. Just because be directly proportional to price. 11%en than a year. Dow defined the intermedi- the oscillator has moved into the upper divergence develops between price and ate, or secondary, trend as three weeks to region is not enough to liquidate a long volume, the technician should regard this many months. The short-term trend is usu- position (or, heaven forbid, short into the as a warning signal of a possible change in ally defined as anything less than two or strong uptrend) .” ’ trend. “\hlume usually goes \\-ith trend; three weeks. Each trend becomes a por- 1blume holds additional information i.e., volume advances with a rising trend tion of its next larger trend.” ’ that must be watched closely; price and I-ol- of prices and falls \\ith a declining one. M71en securities or markets are trend- ume are two important pieces of the tech- This is a normal relationship, and anything ing, trendlines and moving averages are nical puzzle. “First, the matter of volume. which diverges from this characteristic valuable tools to trade with. Ll%en a side- It is always to be watched as a vital part of should be considered a warning sign that ways environment develops, the technician the total picture. The chart trading activ- the pre\-ailing trend may be in the process must resort to another tool, in order to itv makes a pattern just as does the chart of reversing.” ’ detect sudden changes in direction. Side- piice changes.” ’ It is believed by some Divergence occurs when the price chart wavs movements occur more often than (not all) technicians, that the internal makes a new high or low that is not accom- technicians like: “research indicates that strength of the market or a stock is mani- panied by a new high or low in the oscilla- markets generally move in trading ranges fested in volume first, then in price; in tor. The concept of divergence is the ba- and trend less frequently” ’ It is in this other words, volume leads price. The fact sis of the Dow Theory. “The movements instance that the oscillator is very helpful. that some technicians have this belief led of both the railroad and industrial stock An oscillator measures the rate of me to examine whether a volume derived averages should always be considered to- change of prices as opposed to the actual oscillator provides any better signals than gether. The movement of one price aver- price levels themselves. M%en first discov- a price derived oscillator. The Relative age must be confirmed by the other be- ered, oscillators appear to be a magical Strength Index is a price based oscillator. fore reliable inferences may be confirmed. device to the noyice technician. The more Conclusiom based on the movement of experience the technician gains with os- Formulating The Volume one average, unconfirmed by the other, cillators, the less likely it becomes that os- Weighted Relative Strength are almost certain to prove misleading.” ” cillators appear infallible. Index The formula for the \hlume LYeighted In this paper, the oscillator being ex- Relative Strength Index (\11XSI) is The format used was On Balance \‘ol- amined is the Relative Strength Index (RSI), originally created bp \Yelles J. ume (OBY) in the RSI formula, produc- VWRSI= 100- 100 \Yilder. ing a \‘olume 12’eighted Relative Strength 1t VWRS Index. Joseph Granville’s OB\’ is defined VWRS= Averageof up OBV x days RSI= 100- 100 as: 1tRS Averageofdown OBV X days OBV = [ (C - Cp) *V 1 RS= Averageof up closes over x days The \7\XSI is then plotted on a verti- Averageof downcloses over x days [ (IC-CPO 1 cal scale from zero to one hundred. J. J. hlurphl- outlines the three most useful MTA JOUIWti l \\‘inter - Spring 1997 qualities of an oscillator: “when the oscil- Criteria Contintued U.S. Steel Group lator reaches an extreme, when it diverges from price, and when it crosses the neu- (See Tables l-6) March 16,199O to June 14,1996 tral line if present.” “’ All tests were conducted net of commis- PercentageReturn Per Trade sions for every criteria. At a glance Tables for EachGiven Criteria (Weekly) Testing 1 through 6 yielded ambiguous and incon- sistent results. I decided to isolate one RSI VWRSI In order for an oscillator to be valuable, study (T.S. Steel) wave by wave, for each A. Movementscrossing above 70, under 30 45.1 5.3 it should be applicable in more than one scenario studied on a daily and week]: ba- 170overbought. 30oversold) 9 days situation. The \WXSI was tested against sis. Each case was analyzed on a percent- B.Movements crossing above 70, under 30 0.0 -11.3 the RSI on a daily basis over a two-year age return per trade. I offer the results of period and for a six-year period on a (70overbought, 30oversold) 14 days this analysis in two IvaTs, firstl: the tables weekly basis. The original 11 day period below, and second in graph form (page C Movementscrossing above 80. under 20 0.0 -3.1 was used for both the RSI and \7’1XSI. This 21). Finally I compared cumulative aver- 180overbought, 20 oversold) 14 days was then compared to a 9 day period. RI. age percentage returns for all three cases 0 Movementscrossing above 80. under 20 0.0 0.0 Chaiken found that a 9day period is more studied daily and weekly (pages 22-23). (80overbought. 20 oversold) 9 days effective in trading stocks. “For trading E. Movementscrossing above and under 50 -5.6 0.17 stocks, I found that a g-day RSI is much U.S. Steel Group more effective with the 30’and i0 break (50represents the neutral line) 9 days points for trading.” ” Swings are wider on July 18,1994 to June 14,1996 PercentageReturn Per Trade F. Movementscrossing above and under 50 -0.72 -0.53 a g-day formula; and some technicians em- (50represents the neutral line) 14 days ploy 80.20 in place of the 70,30 values. for Each GivenCriteria (Daily) G. Movementsexiting 70 and entering 30 26.44 2.5 IThat Was Tested RSI VWRSI (70overbought, 30oversold) 9 days A. Movementscrossing above 70 under30 48.5 135 X - U.S. SteelGroup (70overbought. 30oversold) 9 days H. Movementsexiting 70 and entering 30 44.5 -16.0 (70overbought. 30oversold) 14 days GKM - GreatLake Minerals (junior B. Movementscrossing above 70, under 30 41.2 -5.7 Canadianmining stock) (70overbou(ht, 30 oversold)14 days I Movementsexiting 80 and entering 20 0.0 -17.0 (80overbought, 20oversold) 9 days DWU - Dow Jones Utility Index C. Movementscrowng above 80, under 20 97.3 54.4 (80overbought. 20oversold) 14 days J. Movementsexiting 80 and entering 20 0.0 -2.0 (80overbought. 20oversold] 14 days Criteria for Testing D. Movementscrossing above 80. under 20 0.0 0.0 A. Movementscrossing above 70. under 30 (70overbought, 30 (80overbought. 20oversold) 9 days oversold)9 days E. Movementscrossing above and under 50 -2.24 -2.5 B.
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