A Genetic Approach To Your Profits
A Genetic Approach To Your Profits
by Marge Sherald
As a trader, you know the process of developing and testing trading systems is never ending if you want to keep up with changing markets. You spend countless hours in front of your computer fine-tuning indicators and trading rules to fit your trading style and increase your profits. In this article, you'll learn how to let a genetic algorithm do a lot of your work, save time, and turbocharge your returns.
THE RELATIVE VIGOR INDEX
Recently, I read Cybernetic Analysis For Stocks And Futures by John Ehlers. Ehlers has built a reputation as the foremost expert in the industry at applying signal processing techniques to trading. One of the indicators in his book, the relative vigor index, caught my attention, and I decided to use that as a starting point for my trading strategy.
The relative vigor index (RVI) is an oscillator that measures the strength of up or down markets by computing the difference between the close and opening prices relative to the total movement for the day. To normalize the index to the daily trading range, the change in price is divided by the maximum range of prices for the day. The basic formula for the RVI is as follows:
Ehlers enhances this basic indicator by applying a low lag finite impulse response (FIR) filter (see sidebar "Formula for finite impulse response") to independently smooth the numerator and denominator, making the signals easier to interpret on a chart. Ehlers observed, "Since the numerator and denominator are lagged the same amount due to filtering, the lag is removed by taking their ratio." Refer to the sidebar "Cyber6 relative vigor index" for the PowerBasic code to compute the RVI.RVI = (Close - Open) / (High - Low)
I applied a simple crossover trading strategy of the RVI and RVI trigger indicator (the trigger is the RVI lagged by one bar) to a number of different stocks. Buy when the RVI trigger crosses above the RVI, and go short when the RVI trigger crosses under the RVI.
FIGURE 1: RVI AND RVI TRIGGER CROSSOVER. This Home Depot (HD) chart displays a simple crossover trading strategy of the RVI and RVI trigger indicator.
...Continued in the August issue of Technical Analysis
of STOCKS & COMMODITIES
Excerpted from an article originally published in the August 2005 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2005, Technical Analysis, Inc.
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