Ultimate Algorithmic Trading System

If marketPosition =-1 and close > entryprice +
1* avgTrueRange(10) then
BuyToCover this bar on close
If marketPosition =-1 and close < entryPrice -
3* avgTrueRange(10) then
BuyToCover this bar on close;
Figure 2.7 illustrates the model of the RSI failure swing algorithm. As you can
see from the diagram, this isn’t a flowchart. It’s our old friend the FSM, so let’s
move through the different states of the machine. We start off gobbling one bar at a
time until we come across a RSI pivot high with a value of 70 or greater. Once this
occurs, the machine goes into State 1 and starts gobbling more bars. The machine
can only transition out of State 1 if one of three events occur: an occurrence of a
RSI pivot low, an RSI value > the original RSI pivot high value, or an RSI value that
is less than 30. Only an occurrence of an RSI pivot low can propel the machine to
State 2. The other two conditions will reverse the machine to the Start state. Once
in State 2, the machine looks for yet another RSI pivot high. In addition to a new
pivot high, another condition must be met before moving onto State 3, and that is
the RSI pivot high must be less than the original RSI pivot high. The same conditions
that reset the machine to the Start state exist at State 2. After the machine attains
State 3, it then tries to propel itself to State 4 by finding an RSI value less than the
RSI pivot low found in State 1. If this occurs, an order to sell short the market is
placed on an MOC basis. Again, the exact same criteria for reversing the machine
back to the Start state are in force in State 3.
RSI < 30
RSI Pivot Hi > 70 State 1 RSI Pivot Lo State 2
Start
RSI > RSI Pivot
Hi
RSI > RSI Pivot
Hi
RSI > RSI Pivot
Hi
RSI Pivot Hi < Prior Pivot Hi
State 3
41
STOCHASTICS AND AVERAGES AND RSI! OH, MY!
FSM
Modeling RSI Swing
Failure Algorithm
Accept
Place
SellShort
Order
RSI < RSI Pivot Lo
FIGURE 2.7
Example of FSM modeling RSI Swing Failure.
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