Ultimate Algorithmic Trading System

Like the description, the diagram is straightforward as well. It might look
complicated, but that is only because of the many different decisions that must be
evaluated before an action is carried out. In the case of this very simple system, a
flowchart diagram isn’t really all that necessary. However, it is great practice, and
eventually you will come across a trading scheme that will be complicated enough
to merit a properly thought-out diagram.
Before proceeding to the next indicator, I must mention that the ADX along with
all other indicators are just building blocks and are not to be used by themselves.
Many successful trading algorithms utilize indicators but not strictly by themselves
and in many cases the indicators are augmented or filtered. Many traders change
some of the logic of an indicator and therefore make it their own and in doing so
bring their own creativity into the process. Most trading algorithms are built on the
shoulders of others. More frequently, traders will utilize a filtering process that will
eliminate excessive trade signals generated by an indicator. In doing so, the trader is
hoping to skip the less productive trades and target the really good ones. Table 2.1
shows the performance of the pure ADX applied to several markets.
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STOCHASTICS AND AVERAGES AND RSI! OH, MY!
Relative Strength Index (RSI)
Continuing on with Welles Wilder, the next indicator that we will discuss will
be the Relative Strength Index (RSI). This indicator is a momentum oscillator that
measures the speed and change of price movements. RSI oscillates between 0 and
100. Traditionally, and according to Wilder, RSI is considered overbought when
above 70 and oversold when below 30. After moving averages, RSI might be the
most popular indicator out there; every popular charting package includes it in its
library.
Its popularity might be partially attributed to its simplicity. The indicator is simply
measuring the momentum of the market over the past number of days. Momentum
indicates the direction and strength of the market. A quickly moving uptrend will
be reflected by consecutive higher-high RSI values. And consecutive lower-low RSI
values will represent just the opposite, a quickly moving downtrend.
Calculation for a 14-day RSI:
1. Going back in time 14 bars compare the closing price of a bar with its prior bar.
If the difference is positive, then accumulate the amount to an upSum variable. If
the difference is negative, then remove the sign and accumulate the difference to
a dnSum variable.
2. If C > C[1], then upSum = upSum + (C − C[1]). If C < C[1], then dnSum =
dnSum +−1 × (C − C[1]).
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