Traders Dynamic Index Trading Strategy

Traders Dynamic Index Trading Strategy – (Backtest, Rules, Setup, Performance)

Trading indicators generally work best when combined rather than being used individually. However, in this case, we will introduce an indicator designed to function as a comprehensive trading system on its own: Traders Dynamic Index trading strategy.

The Traders Dynamic Index is an all-inclusive indicator primarily composed of the RSI and Bollinger Bands. This raises a question: Is it truly effective enough to be considered a complete trading system?

In this article, we will explore what the Traders Dynamic Index is, how to calculate it, and backtest a trading strategy using it.

Related reading:

What is the Traders Dynamic Index?

Traders Dynamic Index (TDI) Strategy

The Traders Dynamic Index (TDI) is a technical indicator employed by traders and investors to assess market conditions and anticipate price shifts. It is a momentum and trend indicator whose main component is the RSI. It was developed by Dean Malone, who devised a versatile indicator in the TDI that suits different timeframes and market situations. Some call this indicator Dynamic RSI.

How to calculate the Traders Dynamic Index?

The TDI indicator incorporates the standard RSI indicator, which gauges the strength of the current trend. Additionally, it utilizes two moving averages of the RSI: a fast one and a slow one, along with Bollinger Bands to assess the oscillators’ magnitude.

To calculate it, we begin by computing the 13-day RSI and its corresponding two simple moving averages: a fast-moving average spanning 2 days and a slow-moving average spanning 7 days.

Subsequently, we proceed to calculate the 34-day Bollinger Bands of the RSI. For both the upper and lower bands, we add 1.6185 standard deviations. And that essentially encompasses the process.

All the time frames are as recommended by the creator. Here’s how the TDI indicator appears on a chart:

Traders Dynamic Indicator example

Some traders argue that the TDI indicator alone can be used as a complete trading system thanks to its integrated approach. We decided to put this to the test and develop a trading strategy using solely the TDI. 

Traders Dynamic Index trading strategy – trading rules

The trading rules of the strategy may seem complex at first, but they really aren’t. The buy signal is triggered when:

  • The fast RSI is higher than the middle band AND…
  • The slow RSI is higher than the middle band AND…
  • The fast RSI is below the upper band

On the other side, the sell signal is flashed when:

  • The fast and slow RSI are greater than 70 OR…
  • The fast and slow RSI are lower than the middle band

Now, the only thing left is to backtest the strategy!

Traders Dynamic Index trading strategy – backtest

We backtested the strategy using the ETF version of the S&P 500, SPY. The data is adjusted for dividends and splits. Here is the equity curve:

The returns are significantly below buy and hold, but not on a risk-adjusted basis. Here are some metrics and trading statistics about the strategy:

  • CAGR is 4.23% (buy and 9.91%)
  • Time spent in the market is 28.76%
  • Risk-adjusted return is 14.70% (CAGR divided by time spent in the market)
  • Maximum drawdown is -27.04% (-55.19%)

Although the strategy doesn’t beat buy and hold, it does really well on a risk-adjusted basis given that it is invested less than a third of the time. Moreover, the drawdown is significantly lower than buy and hold. We don’t think this can be considered a full trading system but the results are not bad.

Traders Dynamic Index – conclusion

To sum up, today we showed you the TDI and how to calculate it and backtested a trading strategy. Although the risk-adjusted returns were good, we think the strategy might do much better with other configurations or paired with another indicator. It is up to you to improve it.

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