Since the RSI is normalized at +/- 100, like the Stochastic, it squashes strong market moves The RSI

is not it. Although far better than the Stochastic or the MACD for OB/OS analysis, this important indicator was created by Welles Wilder (Wilder, New Concepts) to nave universal appeal and easy application across markets. He certainly achieved those objectives, but for the more sophisticated trader something was lost. Since the RSI is normalized at +/- 100, like the Stochastic, it squashes strong market moves. If the Oscillator is at 95 and a big up move continues, it only has 4.9999 points left to go. When the RSI achieved 96.50 on the daily coffee chart below, where could it go? As the move exploded in price, the RSI went down to 93.78, while the Detrended Oscillator increased from 9.41 to 16.19. A seven period input was used for both indicators in this example. On the right side of the chart, we see the Detrend at a whopping value (in relative terms, over four times the original amount of 9.41). The RSI was actually less than it was originally at 89.00. Discernible values of Overbought and Oversold relative to price are of critical importance. Why not use an indicator that plainly illustrates them? Also, consider that Overbought in coffee has a different character than Overbought in corn, which has a different character than Overbought in the S&P! This character doesn't have the elbow room to show itself using the normalized RSI. THE COMMODITY CHANNEL INDEX (CCI): Finally, there's the Commodity Channel Index (CCI). I have the least amount of criticism for the CCI, probably because it does a fairly good job of approximating the Oscillator I use. Although Donald Lambert's 3 development of this indicator was tied to Trend and cycle work, most traders who use this indicator use it as an Overbought/Oversold tool. The CCI is not normalized to +/- 100 and therefore requires more understanding to employ. This is likely why it is not used (or misused) extensively. Although the CCI has value, I believe the Detrended Oscillator achieves significantly better results. 3 Donald Lambert, "Commodity Channel Index: Tool for Trading Cyclic Trends", Technical Analysis of Stocks & Commodities magazine, July /August 1983, page 120122. THE DETRENDED OSCILLATOR: The Detrend is an indicator that's been around a long time. I don't know who the originator was or when it was developed. The Detrend attempts to measure variations of price about a zero line which represents the Trend, hence Detrended. We define the Trend as a given Moving Average, then we mathematically make that average constant, or the zero line. The formula for the Detrend is simple:

Detrended Oscillator = Close minus Moving Average. A reasonable variation is the high or low, minus a given Moving Average as depicted on Chart 7-5. Some of my colleagues believe incomprehensible math equates with genius, and therefore to profits. I always believe in keeping things as simple as possible. Since I did my research on the indicator in the early 80s on an 8088 processor, keeping the math simple was a practical, as well as a philosophical consideration . I approached research on the Detrend in the same way as I approached research on the DMAs. I observed the quality of the indicator's usefulness, in trading situations, over a broad spectrum of data. I used none of the typical optimization techniques popularized someyears later. In observing literally thousands of data sets, with a wide variety of combinations of the detrend (simple, weighted, exponential, and mathematical MAs, of the median, high, low, close, etc.), my final conclusion for the best data sets were: 1. The close (today) minus a three day simple Moving Average of the close. and 2. The close (today) minus the seven day simple Moving Average of the close. Of the two data sets, the 7 day MA of the close is clearly the most useful in the context I apply it. I still use both data sets, however, particularly under Strategy 1, described below. Aside from the profits generated from this laborious enterprise, the most gratifying aspect is that I see no reason to change the parameters today, over 15years later!