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Adaptive RSI indicator EURUSD H1 charting 2015 Nov 24 to Dec 12

Adaptive RSI is a Meta Trader 4 indicator for Forex technical analysis. In this article I will analysis the signals given by Adaptive RSI for the pair EURUSD, hour 1 time frame, during 2015 Nov 24 to Dec 12. The data is from Oanda MT platform.

How the signals are defined

In this article, signals of over bought and over sold are checked. The over bought level is 80, and the over sold level is 20. Unlike the standard RSI which uses level 70 and 30, Adaptive RSI is more sensitive to market condition changes so larger levels should be used.

The Adaptive RSI uses Volatility method, period 60. For comparison, a standard RSI period 14 is also plotted on the chart, with level 80 and 20.

The terms and how to read the charts

Three numbers are given for each signal given by Adaptive RSI. Each number indicates one candle bar. The first number is labeled at the bar where Adaptive RSI is still in over bough/sold area (greater than 80 or smaller than 20). The second number is labeled next to the first number, where the bar go to the normal zone (between 20 and 80). This bar is called “signal bar”. This bar can become a signal bar after it is completed, so no order should be placed during the second bar. The third number is labeled at the third bar, which is called “entry bar”. An entry can be entered at the open of the entry bar.

The first chart -- Dec 2 to Dec 12

The chart is EURUSD, H1, from Dec 2 to Dec 12. Adaptive RSI gives 3 entries during the period.

Entry 1 is over sold at bar 1, 2, and 3. This was the time of big event NonFarm Payrolls. Though Adaptive RSI gave good over sold signal and entering bar 3 will give quite good pips (but bad risk reward ratio), it's wise to avoid trading during NFP.
Note that the non-adaptive RSI didn't give any signal.
Also note that how the look back period became much larger during the NFP news.

Entry 2 is over bought at bar 4, 5, 6. This was several hours after NFP.
Note that the standard RSI also gave the signal, but it was one bar lagged than Adaptive RSI.

Entry 3 is over bought at bar 7, 8, 9. This was a perfect entry for short trade.
The standard RSI gave exactly the same signal.

The first chart -- Nov 24 to Dec 2

The chart is EURUSD, H1, from Nov 24 to Dec 2. Adaptive RSI gives 5 entries during the period.

Entry 1 is over bought at bar 1, 2, 3. To make the entry success, larger stop loss needs to be placed. Tight SL won't work. The standard RSI didn't see this signal.

Entry 2 is over sold at bar 4, 5, 6. Same as entry 1, stop loss is hard to place. Also same as entry 1, the non-adaptive RSI ignored this signal.

Entry 3 is over bought at bar 7, 8, 9. This is a false signal. The standard RSI didn't catch this signal, again.

Entry 4 is over bought at bar 10, 11, and 12. This is a good signal, because this is a second signal after the false signal at entry 3. Again, standard RSI didn't see this signal.

Entry 5 is over sold at bar 13, 14, 15. This is a hard signal because it's not quite clear. The standard RSI didn't catch this signal. Indeed, standard RSI didn't give any signal during this period.

Conclusion

Adaptive RSI can give more signals than the standard fixed period RSI, and it's much more sensitive to the market condition changes than fixed period RSI. This probably because in this test levels 80/20 are applied to standard RSI instead of 70/30. However, you can test to compare Adaptive RSI to standard RSI with levels 70/30, Adaptive RSI can still gives more signals, and the standard RSI is much much lag than Adaptive RSI.

Kindly caveat

Though in this article only Adaptive RSI is used to check the signals, Adaptive RSI should not be used as the only indicator in your trading system. You should use other indicators such as moving average to filter out the false signals to help Adaptive RSI perform better. Adaptive RSI is a tool, not holy grail.

Also note all analysis here is after the signals were constructed. This is a little bit of hindsight. In real trading, it will be more difficult to catch those signals.

Discussion

ShannaMcdowell4, 2017/11/14 09:05

There is certainly a lot to learn about this topic. I really like all the points you have made.

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