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closes will be closer to the low of thatprice range. As with RSI and other oscil-lators, the price range is subjective, hutgenerally ranges between nine and 20.There arc three values for stochastics,the tirst of which usually is omitted fromcharts but is necessary to calculate thesecond and third values. Raw K is the

most basic stochastic value. The othervalues are smoothed versions of Raw K: K is a moving average of Raw K, and D is a moving average of K.The formulas for a nine-day stochas-tics oscillator is:RawK = 100 ({close_l - low_9) /

(high_9 - low_9)),whereClose_l = current period's closeHigh_9 = nine-day highLow_9 = nine-day low K = Kt-l + (0.5 (Raw D = Dt-l + (0 .5

RSI:Asystematic approachBY STANLEY DASHR SIhas the usefulnessofbeing abletomeasure bo th over-bought/oversold levelsandindicate the presenceofatrend.Levels of30 and 70 are gen erally usedasdefault guidelines foroverbought and oversold. Additionally, a value greater than50 may indicate an uptren d, wh ileavalue less tha n 50 mayindicate a dow ntrend.

These interpretations may becombinedbyexaminingpotential bullish periodsinwhich RSIisgreater than 50yetless than 70. Conversely, bearish periods may be ide ntifie d asthose w ithRSIvalues less tha nSO,yet greater tha n 30.

The chart shown below identifies bars accordingtothattheory. The market shownisNew York Mercantile Exchangecrude oil on 33-minute bars fromJan.2,2008, throug hAug.152008.Blue bars are those that match up w ithRSIlevels greaterthan 50 andlessthan70,which are gen erally bullish. Red barsare those w ithRSIlevelsless than 5 andgreater tha n30,whichare generally bearish.

j)6 n i/ia s/ii sia n nt m nt s/9m

This concept also can be incorporated into a trading strat-

In an attempttocut dow n short-term losing trades, a tral 2one,ofsorts,iscreated,RSI isconsidered bu llish a boinstead of50, and RSI is considered bearish belo w 47 insof 50. TheRSIindicator above appears w ith th e neutral zrepresented by tw o horizon tal lines, oneat47 and oneatinstead ofa single horizon tal lineat50.Long positions are closed wh enRSIexceeds 70, and spositions are covered when RSI falls below 30.Astop los 1,000 from entry is also include d, and a commissionof

per round tu rn was chargedtoeach trade .

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This concep t doesareasonably g ood jobofcapturing lmoves. However, the winning percentage is significantly lthan 50%, indicating that there arealarge numberoffpositives ide ntified by the logic. Both attribute s are represetiveoftrend -follow ing systems.

S tanley D ash is di r ector oft echni cal analysi s f or Tr ade S taS ecu r i t i es .E-mailhim atsdas h@tr ade st at i on. com. This ar td o e s notc o n s t i t u t e anyt y p e of t r a d i n gor in v e s t m e n tr

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