Basic Techniques  |  DEC 2001

Threshold Trading Revisited by Rudy Teseo

Threshold Trading Revisited by Rudy Teseo An introduction for newcomers or a refresher for old-timers: Here are a couple of tools we sometimes forget to use. In trading jargon, the “threshold” refers to the presignal area of overbought/oversold indicators — the area above or below the limits set in threshold-crossing indicators. The relative strength index (RSI) and stochastics are probably the best known threshold-crossing indicators and are great for creating entry and exit trading signals. The presignal areas — the “thresholds” — are useful for knowing when to act, whether you’re buying or selling. THE TWO FRIENDS: RSI AND STOCHASTICS The relative strength index (RSI), developed by J. Welles Wilder, is a single-component oscillator that ranges between zero and 100%. This oscillator actually measures the ratio of recent upward price changes to downward price changes within the same security over a specified period, which Wilder defined as 14. Since then other periods have been suggested — mainly three, nine, and 25. When the up and down movements are equal, the RSI is at 50%. When U>D, the indicator will be somewhere between 50% and 100%. When U<D, the indicator will be between 50% and zero.

by Rudy Teseo