October 27, 2010
The Dynamic Zone RSI Technical Indicator
The Dynamic Zone RSI indicator is one that was brought to my attention recently by one of my readers. It is essentially the same as the traditional RSI indicator except that it uses dynamic upper and lower limits that constantly change (based on market conditions) to mark overbought and oversold areas. So rather than use 70 and 30 or 80 and 20 to determine when the market is overbought or oversold, you simply wait until the RSI indicator is above the upper limit or below the lower limit.
However that isn't really the best way to use this indicator. A more effective method is to wait for the RSI indicator to go above the upper limit (if you're considering opening a short position) and cross back downwards through this upper limit for confirmation that the upward trend is now over.
Alternatively if you really want to boost your chances of success, you could wait until there is a divergence pattern on the basic RSI indicator before trading any reverse crossover of the upper or lower limit.
Let me show you a chart to show you how the Dynamic Zone RSI indicator works in practice:
You can see that the Dynamic Zone RSI indicator is exactly the same as the basic version except with the addition of the two upper and lower limits.
I've only been playing around with this indicator for a few hours now, but I have to say I'm not overly impressed with it so far. You seem to get a lot of false crossovers even on the longer time frames, which is never a good sign. So for now I think I will stick to the basic RSI indicator rather than the dynamic version.
If you are using this indicator yourself, I would love to know how it is performing and what settings you use.