The Cumulative RSI Indicator: A Guide by Larry Connors (83% Win Rate)
In the world of technical analysis, the Relative Strength Index (RSI) is a widely used momentum oscillator that measures the speed and change of price movements. Larry Connors, a prominent trader and author, introduced a variation known as the Cumulative RSI, which aims to improve trading accuracy and profitability. This article delves into the concept, calculation, and application of the Cumulative RSI, offering insights into its benefits and strategies for effective use.
Key takeaways
- The cumulative (RSI Relative Strength Index) aggregates RSI values over a specified period.
- It’s an oscillating indicator.
- We provide you with a backtested Cumulative RSI trading strategy.
- This article is just one of many trading indicators we have covered.
What is the Cumulative RSI?
The Cumulative RSI is a modified version of the traditional RSI, designed to smooth out its oscillations and provide more reliable signals. While the standard RSI oscillates between 0 and 100, reflecting overbought and oversold conditions, the Cumulative RSI aggregates these values over a specified period, creating a more stable and continuous indicator.
How is the Cumulative RSI Calculated?
The calculation of the Cumulative RSI involves the following steps:
- Calculate the Standard RSI: Use the traditional formula for RSI, which involves calculating the average gains and losses over a specified period (usually 14 days).
- Aggregate RSI Values: Instead of using a single RSI value, sum the RSI values over a specified period. This creates the cumulative effect, smoothing out short-term fluctuations.
- Plot the Cumulative RSI: The cumulative values are then plotted on a chart, providing a visual representation of the indicator’s trend.
Here is an example of how the 2-day Cumulative RSI indicator might look like:
Cumulative RSI trading strategy
Let’s show you an example of a cumulative RSI trading strategy. We make the following trading rules:
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If we employ these trading rules on the S&P 500 (SPY), we get the following equity curve from inception until today:
There are 167 trades; the average gain per trade is 0.67%, and the win rate is 83%. Max drawdown is 14%. All in all, a good strategy, bit not too many trades, which make the strategy is invested only 7% of the time (risk-adjusted return is 49%).
The complete code for the strategy is provided here (Amibroker code):
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Key Differences Between Traditional RSI and Cumulative RSI
- Smoothing Effect: The Cumulative RSI smooths out the traditional RSI values, reducing the noise and false signals associated with short-term fluctuations.
- Signal Reliability: Due to its cumulative nature, the Cumulative RSI provides more reliable and stable signals for identifying overbought and oversold conditions.
- Trend Analysis: The Cumulative RSI is better suited for identifying and following longer-term trends compared to the traditional RSI.
Benefits of Using the Cumulative RSI
- Enhanced Accuracy: The smoothing effect reduces the likelihood of false signals, providing more accurate indications of market conditions.
- Improved Trend Identification: By aggregating RSI values, traders can better identify and follow prevailing trends, aiding in more informed decision-making.
- Reduced Noise: The Cumulative RSI minimizes market noise, offering a clearer view of the underlying momentum and strength.
How to Use the Cumulative RSI in Trading
Strategy 1: Trend Following
One of the primary uses of the Cumulative RSI is in trend-following strategies. Traders can use the indicator to confirm the direction of the prevailing trend and make informed trading decisions based on its signals.
- Bullish Trend: When the Cumulative RSI is above a certain threshold (e.g., 50), it indicates a bullish trend. Traders can look for buying opportunities in line with this trend.
- Bearish Trend: Conversely, when the Cumulative RSI is below a certain threshold, it signals a bearish trend, suggesting selling or shorting opportunities.
Strategy 2: Overbought and Oversold Conditions
Similar to the traditional RSI, the Cumulative RSI can also be used to identify overbought and oversold conditions.
- Overbought: When the Cumulative RSI reaches high levels (e.g., above 70), it indicates that the asset may be overbought, and a potential reversal or correction could be imminent.
- Oversold: When the Cumulative RSI drops to low levels (e.g., below 30), it suggests that the asset may be oversold, presenting a potential buying opportunity.
Implementing the Cumulative RSI: A Step-by-Step Guide
- Choose Your Platform: Select a trading platform that supports custom indicators, such as MetaTrader, TradingView, or Thinkorswim.
- Set Up the Indicator: Input the formula for the Cumulative RSI, specifying the desired period for aggregation.
- Analyze the Chart: Plot the Cumulative RSI on your chart and observe its behavior in relation to price movements.
- Develop Your Strategy: Based on the Cumulative RSI signals, develop and backtest your trading strategy to ensure its effectiveness.
- Monitor and Adjust: Continuously monitor the performance of the Cumulative RSI and make necessary adjustments to your strategy as market conditions evolve.
Conclusion
Larry Connors’ Cumulative RSI is a powerful tool for traders seeking to enhance their technical analysis and improve trading outcomes. By smoothing out the traditional RSI values and providing more reliable signals, the Cumulative RSI helps traders identify trends, reduce noise, and make more informed decisions. Whether you’re a novice or an experienced trader, incorporating the Cumulative RSI into your trading strategy can offer significant advantages and contribute to your overall success.