Better RSI
Introduction
We have worked on a collection of indicators with a view to reducing the number of false signals in classic oscillators such as RSI, Stochastic and more. Better RSI is one such indicator.
What and why?
Better RSI attempts to reduce the number of false signals generated by the classic RSI. Interpretation of the indicator is the same as the classic RSI. When markets are trending, overbought and oversold signals form the classic RSI become false. This aims to limit ob/os signals during strong trends where the likelihood of reversal is lower. Improving classic oscillators is a slight alternative to creating new oscillator functions and can become useful in algorithmic trading.
More detail
The classic RSI works best during sideways or consolidating markets but is far less useful in trending markets. Various functions are available to determine trend strength. In this case We are using the ADX function to determine trend strength due to its simplicity and speed. (FDI is also a good filtering option but that’s another Indicator Coming Up. We attenuate premature overbought or oversold signals in RSI if the trend shown by ADX is strong and/or strengthening.
RSI signal attenuation is linear in the case of this indicator; linear between a minimum ADX of 23 (no attenuation) and a maximum ADX of 70 (full attenuation). The ADX signal is normalized in a linear way and then used to affect the RSI signal. It is also possible to apply logarithmic, quadratic or parabolic curves to the attenuation signal so that the affect on RSI dampening might be further aligned with market directions.
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