In the post, we show how to increase both the accuracy and responsiveness of a trading strategy with a little lag penalty. This can be done by using smoothing indicators that trade-off increased lags against less noise in indicator signals from price fluctuations.
Let’s see how to create a smoothed RSI indicator only using a Moving Average in Easylanguage for TradeStation and MultiCharts.
We will use the classic RSI, and we will go to create two custom indicators.
We placed the classic indicator on the chart’s bottom, below the graph.
Also, we created a PaintPar indicator that will change the candle’s colors according to the trend.
The yellow line is the standard ATR, while the red line is the smoothed ATR through its 10-period average (2-weeks).
The classic RSI is speedy and more susceptible to random market movements. Obviously, the more you increase the RSI period, the less nervous the indicator will become. However, some strategies even use a 2-period RSI, such as Larry Connors’ very famous RSI-2 strategy.
It often happens that a smoothed indicator can perform better in its standard version.
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Moving averages to normalize prices or other values is widely used, especially in the construction of automatic trading systems it is advisable.
We can create smoothed versions of any indicator, and the procedure we will show you will therefore be useful for your every need.
The effect you will get will always be the same, of the values less subject to price changes and less reactive but more reliable.
One of the main reasons for creating smoothed versions is limiting RSI false signals by slowing down the indicator.
How to create the smoothed RSI in EasyLanguage for TradeStation and MultiCharts
The formula in Easylanguage to “smooth” and make a series of data slower as the RSI line is this:
RSI_VALUE = RSI(Price, Length);
RSI_SMOOTH = Average (RSI_VALUE, Smooth);
This indicator is handy as a trend filter. We then build a PaintBar indicator that will color the candles green when the ATR is above 50 and red when the ATR is below.
The PaintBars available on TradeStation and Multicharts are very useful to get an immediate idea of the current trend.
If we compare the PaintBar calculated with the standard RSI length, we see fewer signal changes.
The RSI visualization through the paint bars allows you to eliminate the indicator from the graph below and replace it with another one of your choices.
The RSI is undoubtedly not as reliable as a trend indicator because it was not created for this function; on the contrary, the RSI was created for mean-reverting strategies.
The visualization on the graph through the coloring of the candles could be useful for graphical analyses on the fly using multiple windows open simultaneously.
Some traders use the RSI crossing above and below 50 to open long and short positions, but it is not a robust strategy from the tests carried out.
It is, therefore, preferable to use this indicator exclusively to identify the primary trend. However, we want to remind you that one of the most used ways to trade with RSI is searching for bullish or bearish divergences to anticipate trend changes.
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