Kairi Relative Index – Rules, Settings, Strategy, Returns

There are many popular momentum oscillators available for technical analysis today, but this forgotten oscillator — the Kairi Relative Index — can still be very effective for swing trading if you know how to use it. What do you know about this indicator?

The Kairi Relative Index (KRI) is a technical oscillator of Japanese origin that has lost its popularity due to newer and more popular momentum oscillators, such as the RSI and stochastic. It measures the deviation of a security’s price from its simple moving average (SMA) over a chosen period. The indicator works better on the daily timeframe when the period is far enough, usually more than 20 days.

In this post, we will take a look at most of the questions you may have about the Kairi Relative Index: what it is, how it works, and how you can use it to improve your trading strategies. Read along!

Key takeaways

1. Definition and Purpose:
   • A Japanese-origin technical oscillator that measures the percentage deviation of a security’s price from its simple moving average (SMA) over a chosen period.
   • Less popular compared to newer momentum oscillators like RSI and stochastic.
2. Visual Representation:
   • Displayed in the indicator box below the price chart as a single line oscillating around the zero line.
   • Levels of +10 and -10 indicate potentially overbought and oversold conditions, respectively.
3. Best Use Cases:
   • Ideal for swing traders, especially on the daily timeframe.
   • Works better when price movements on lower timeframes remain close to the SMA.
   • A longer period (typically over 20 days) is necessary for meaningful deviations.
4. Trading Strategies:
   • Swing signals are more reliable when aligned with the trend.
   • Can also be used by mean-reversion traders for trading pullbacks, particularly when combined with overbought/oversold signals and divergence.
5. We show you a backtested Kairi trading strategy complete with trading rules and settings.
6. Please click here for a technical indicators list.

What Is the Kairi Relative Index?

The Kairi Relative Index (KRI) is a technical oscillator of Japanese origin that has lost its popularity due to newer and more popular momentum oscillators, such as the RSI and stochastic. It measures the percentage deviation of a security’s price from its simple moving average (SMA) over a chosen period.

As with other oscillators, the indicator is usually placed in the indicator box under the price chart. It consists of a single line that oscillates about the zero line, with the +10 level indicating a potentially overbought market condition and the -10 level indicating a potentially oversold market condition.

The indicator is most useful for swing traders, as it works better on the daily timeframe, especially when the price doesn’t deviate much from its SMA on the lower timeframes. The period has to be far enough, usually more than 20 days, to see a reasonable deviation. Its swing signals are better taken in the direction of the trend, but mean-reversion traders can still use it to trade pullbacks when it gives an overbought or oversold signal +/- divergence.

On a chart, the Kairi Relative Index might look like this:

Kairi Relative Index trading strategy – rules, settings, returns, and performance

Let’s backtest a trading strategy that uses the Kairi Relative Index – complete with trading rules and settings.

We make the following trading rules:

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Commissions of 0.03% per trade is included.

This is a mean reversion strategy, and that type of strategy works best for stocks. Thus, we backtest the S&P 500 (SPY) from its inception in 1993 until today.

Trading statistics, returns, and performance (including commissions and slippage) for gold (GLD):

• Number of trades: 297
• Average gain per trade: 0.63%
• Annual returns (CAGR): 5.7%
• Win rate: 72%
• Time spent in the market: 14%
• Risk-adjusted return: 40%
• Max drawdown: 23%

This is the code we used for the backtest (Amibroker):

THIS SECTION IS FOR MEMBERS ONLY. _________________ BECOME A MEBER TO GET ACCESS TO TRADING RULES IN ALL ARTICLES CLICK HERE TO SEE ALL 400 ARTICLES WITH BACKTESTS & TRADING RULES

How Does the Kairi Relative Index Work?

The Kairi Relative Index works as a price oscillator that measures how far away a security’s price is trading from its simple moving average (SMA) over a chosen period. It calculates the percentage deviation of the current price from its SMA (the mean price) and uses that to gauge whether the price is due to revert to its mean.

Extreme readings — usually greater than a 10% deviation — suggest that the price may be due to revert to its mean. However, this would depend on the specific security’s normal volatility and the direction of the trend. Securities that move a lot will generally have larger percentage deviations than those that don’t move a lot.

So, while the +10 and -10 levels mark the overbought and oversold zones respectively by default, it is best to confirm with the asset you are trading what the normal deviations from the mean look like to find the optimal overbought and oversold levels for the asset.

Another factor to consider is the direction of the trend. In a strong uptrend, the indicator can stay in the overbought region for a long time and barely go below the zero level during a pullback. In such a situation, it wouldn’t make sense to wait for an oversold reading at -10% deviation to look for buy setups or look for sell setups at +10% overbought readings.

Likewise, in a strong downtrend, the indicator can remain in the oversold region for a long time and barely go above the zero level. So, you have to find the right levels for such market conditions.

Why Is the Kairi Relative Index Important in Trading?

The Kairi Relative Index is important in trading because it shows how much the price has deviated from its mean, represented by an SMA. As you may already know, the price, just like most time series, tends to revert to its mean when it moves significantly away from it in any direction.

The KRI offers a way to measure this deviation in percentage value. It estimates what may constitute a significant deviation on either side and marks it as the overbought or oversold level. This helps mean-reversion traders to know where to look for trade setups. Swing traders can also use it to find trade setups in the trend direction during a pullback or in a sideways market.

Who Developed the Kairi Relative Index?

The person who developed the Kairi Relative Index is not known, but we know the indicator originated from Japan. Kairi is a Japanese word that means “to separate or deviate from”.

The indicator was very popular in the early years of technical analysis, but its popularity has waned since the 1950s and 1970s when traders shifted to more modern momentum oscillators like the stochastic and RSI. However, the indicator can still be useful to swing traders and mean-reversion traders.

How Is the Kairi Relative Index Calculated?

The Kairi Relative Index is calculated using this formula:

KRI = [(CCP — SMA_n) / SMA_n] x100

Where:

KRI = Kairi Relative Index

CCP = current period’s closing price

SMA = simple moving average

n = the number of periods used in the SMA

Here are the steps for calculating the Kairi Relative Index:

1. Choose the number of periods to use for your SMA
2. Calculate the SMA by adding the closing prices for the chosen periods and dividing the sum by the number of periods
3. Subtract the SMA from the current close price
4. Divide the difference by the SMA
5. Multiply the result by 100
6. Plot the indicator by repeating the process as each period closes

What Are the Key Components of the Kairi Relative Index?

The key components of the Kairi Relative Index include:

• The current closing price: This is the closing price of the current period (price bar). It is where the price is at the moment. It is compared to the mean price to know how much the price has deviated from the mean.
• The n-period SMA: This is a simple moving average of the closing prices over a chosen number of periods (n). It gives a measure of the mean price, which is subtracted from the current closing price to calculate how much the price has deviated, which can give a clue about a possible mean-reversion move.

When Should You Use the Kairi Relative Index?

You should use the Kairi Relative Index when you want to find a swing trading setup in the trend direction following a pullback. This means you must use some other indicator or price action analysis to identify the trend direction first.

For example, if the market is in an uptrend, you can look to go long when the KRI rises from the oversold zone after a pullback. If the trend is so strong that pullbacks don’t cause the indicator to reach the oversold region, you may look for buy setups when the KRI climbs back above the zero level, suggesting a resumption of the uptrend.

Also, you can use the indicator when you want to use a mean-reversion strategy, especially in a range-bound market. In this case, you can trade the bounce from the lower boundary (support level) and upper boundary (resistance level) of the range if the KRI shows an oversold/overbought signal or a divergence signal.

How Can the Kairi Relative Index Help Identify Trends?

The Kairi Relative Index does not identify the main trends on whatever timeframe you are trading since it is an oscillator. It only tracks the individual price waves as they swing above and below the mean price. However, these swings on a higher timeframe would be the trends on a lower timeframe.

So, you can use the KRI to identify trends if you use a multi-timeframe analysis where you identify a higher timeframe swing and then go to a lower timeframe where the swing would become the trend. For example, a swing on the daily timeframe can be a trend on the hourly timeframe.

What Does a High Kairi Relative Index Value Indicate?

A high Kairi Relative Index value indicates a significant upside price deviation from its mean. But what is high enough to anticipate a price reversion will vary from asset to asset. In assets that move a lot, such as certain stocks, the price can deviate by more than +30-40% without making any reasonable pullback to its mean.

This is why you have to find out what the normal upside deviation for an asset is before setting the overbought level on the indicator to identify abnormal deviations.

What Does a Low Kairi Relative Index Value Indicate?

A low Kairi Relative Index value indicates a significant downward price deviation from its mean. But what is low enough for a price reversion will vary from asset to asset. Assets that move a lot, such as certain stocks, can deviate by more than -30% to -40% without making any reasonable pullback to its mean.

This is why you must have an idea of the normal downside deviation for the asset you are trading before setting the oversold level on the indicator to identify abnormal downside deviations.

How Do You Interpret the Kairi Relative Index Signals?

To interpret the Kairi Relative Index signals, you have to use other indicators or another form of analysis to find the direction of the market trend. If there is an uptrend, you focus on buy signals, which can be the oversold signal, a bullish divergence, or an upward zero-line crossover after a pullback.

When the market is trending downward, you focus on the sell signals, which can be the overbought signal, a bearish divergence, or a downward zero-line crossover after a pullback. In the case of a range-bound market, you can look for both signals — buy signals at the bounce from the lower boundary (support level) and sell signals at the upper boundary (resistance level) of the range.

Can the Kairi Relative Index Be Used for Day Trading?

Whether the Kairi Relative Index can be used for day trading will depend on how the asset moves on the intraday timeframes. If there is enough intraday volatility for the asset to deviate significantly from its mean, then, it can provide potential mean-reversion trading opportunities.

For instance, if the price is in an uptrend and pulls back to a support level, it could be a trading opportunity if the KRI gives an oversold signal or makes an upside zero-line crossover which is a sign that the price wants to start rising again.

How Does the Kairi Relative Index Compare to Other Indicators?

Compared to other indicators, especially modern momentum oscillators like the stochastic and RSI, the Kairi Relative Index is considered an outdated momentum oscillator. Its popularity has declined since the 1970s when the RSI was released.

The KRI simply measures the price deviation from its SMA, while the RSI, stochastic, and ROC indicators have some elements of trend momentum in their calculations.

Is the Kairi Relative Index Suitable for All Market Conditions?

No, the Kairi Relative Index is not suitable for all market conditions, as it gives a lot of false signals in choppy market conditions. The indicator can only work in a trending market or a sideways market with well-defined range boundaries.

It does not perform well in choppy market conditions where the price frequently spikes in different directions.

What Are the Limitations of the Kairi Relative Index?

The limitations of the Kairi Relative Index are as follows:

• The indicator is based on how the price deviated from its SMA, which normally depends on how the asset moves — the price must move very fast in order to move away from its moving average.
• In slowly moving assets, the indicator would simply crisscross the zero line, as the price stays hugged to its SMA.
• In fast-moving markets, the indicator can stay in the overbought or oversold region for a long time, as the price continues trending in one direction.

How Do You Combine the Kairi Relative Index with Other Indicators?

To combine the Kairi Relative Index with other indicators, you have to understand how the indicator works so you can combine it with other indicators that can complement it. The KRI is an oscillator that uses a mean-reversion logic to anticipate a price reversal after significantly deviating from its SMA.

The best indicators to combine it with are trend indicators like the moving average and support and resistance indicators/tools. In an uptrend, look for only buy signals, and in a downtrend, look for only sell signals. For a range-bound market, you can look for both buy and sell signals at the right levels.

What Are the Best Settings for the Kairi Relative Index?

The best settings for the Kairi Relative Index will depend on the trading strategy and backtesting results. The default settings on TradingView are 50-period SMA and +/-10% deviation for overbought/oversold levels.

However, you can change the settings to what you want. You will have to backtest your strategy, experimenting with different settings to find the right settings that offer the best edge to your strategy. If you trade more than one asset, you will have to backtest the strategy on each asset as the right settings may differ for different assets.

How Can Beginners Use the Kairi Relative Index Effectively?

Beginners can use the Kairi Relative Index effectively if they learn how it works and create good trading strategies with it. The first step is always to study resource materials like this one to learn how the indicator works.

Then, they should formulate some strategies and open a demo account to try out their strategies. When they are convinced of the performance of their strategies and their mastery of them, they may look to open real accounts.

What Mistakes Should You Avoid When Using the Kairi Relative Index?

The mistakes you should avoid when using the Kairi Relative Index include:

• Trading the KRI as a standalone strategy
• Not combining it with other indicators to trade in the right directions
• Not creating a reliable, backtested strategy with clear entry and exit criteria before using the indicator to trade
• Trading against the trend
• Not having a robust risk management plan

How Do You Add the Kairi Relative Index to a Trading Platform?

To add the Kairi Relative Index to a trading platform, search in the indicator section of the platform to check if it is one of the built-in indicators in the platform.

If it isn’t, you have to get a custom KRI indicator and install it on the platform first. Then, go to the indicator section and double-click on it to attach it to the chart. A box may pop up where you input your preferred settings.

How Often Should You Update the Kairi Relative Index Settings?

How often you update the Kairi Relative Index settings will depend on how often you evaluate your trading results to know when the indicator needs some tweaking.

Your evaluation results will determine whether to update the settings or not. During every update, you will have to backtest the new settings to be sure they offer an edge.

Can the Kairi Relative Index Predict Market Reversals?

Yes, the Kairi Relative Index can predict market reversals but not all the time. That may happen in a range-bound market, but not likely in a trending market. In a trending market, the KRI may only spot a potential pullback.

How Do You Backtest the Kairi Relative Index?

To backtest the Kairi Relative Index, follow these steps:

1. Identify the markets you want to backest your KRI strategy.
2. Gather the historical data you need for the backtesting and divide the data into in-sample and out-of-sample data.
3. Formulate your KRI strategy and state the parameters or settings you need to adjust.
4. Convert the strategy into a trading algorithm.
5. Run your backtesting on the in-sample data and optimize with the out-of-sample data, adjusting your parameters as needed.
6. Evaluate the results of your backtesting.

What Are Some Successful Trading Strategies Using the Kairi Relative Index?

Some successful trading strategies using the Kairi Relative Index include:

• Trend-continuation swing trades: These trades aim to profit from the next impulse swing in the trend direction after a pullback to a support or resistance level as the case may be. A corresponding KRI oversold/overbought signal, divergence, or zero-line crossover can be a trigger for such trades.
• Mean-reversion strategies: These refer to strategies that aim to trade in either direction as the price reverts to its mean. They work better in range-bound markets.

How Does the Kairi Relative Index Fit into a Trading Plan?

Where the Kairi Relative Index fits in a trading plan is as a trade entry trigger. As an oscillator, you can’t use it to identify the trend direction (except with a multi-timeframe analysis), so you have to use other indicators to identify the trend direction and spot key support/resistance levels where a pullback may end.

When these conditions are met — a trending market with a pullback to a key level — you can use the KRI to spot the reversal of the pullback so you enter to ride the next impulse swing.