

Random Walk Index II 


All,
I sure was wrong about that clear sailing to the top of the Horizontal Channel, looks like the DJI will test the bottom instead <G>. All my open positions closed below their stops today, so I'll close everything tomorrow with one possible exception. DELL did break through the bottom of the short term up trend channel but is now close to the bottom of the intermediate term channel. If it opens up tomorrow and looks like it's trying to turn, I may hold on to it. On the other hand, I don't want to let a profit get away <G>.
Jim
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RWI  Random Walk Index System  E.M. Poulos/T. Maas  for Metastock v6.x
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Rewritten by Ton Maas  981001  MsIRB@xxxxxxxxx  Amsterdam  The Netherlands.

The original formula of the Random Walk Index, was created by Equis Intl. Using information from the article "Are There Persistent Cycles", by E. Michael Poulos, in the September 1992 issue of TASC.

This indicator is defined as the ratio of an acutal price move to the expected random walk. If the move is greater than a random walk, and thus a trend is present, its index will be larger than "1.0" .
Random Walk
An economic theory that price movements in the commodity futures markets and in the securities markets are completely random in character (i.e., past prices are not a reliable indicator of future prices).
Random Walk Index
Description
In an effort to find an indicator that overcomes the effects of a fixed lookback period and the drawbacks of traditional smoothing methods, Michael Poulos developed the Random Walk Index. The Random Walk Index is based on the basic geometric concept that the shortest distance between two points is a straight line. The further prices stray from a straight line during a move between two points in time, the less efficient the movement.
Interpretation
Mr. Poulos found significant evidence during his research that the "dividing line" between short and longterm time frames for most futures and stocks is right around eight to 10 days. Therefore, he feels an effective trading system using the RWI can be devised using two different time frames:
1.a shortterm RWI (two to seven periods) for the market's frantic, random side and 2.a longterm RWI (eight to 64 periods) for the market's steady, trending side.
Peaks in the shortterm RWI of highs tend to coincide with price peaks.
Peaks in the shortterm RWI of lows tend to coincide with price troughs.
Readings of the longterm RWI of highs above 1.0 provides a good indication of a sustainable uptrend.
Readings of the longterm RWI of lows below 1.0 provide a good indication of a sustainable downtrend.
Indicators
The Random Walk Index is standard buildin in Metastock v6.5. See below for its Parameters. However custom versions can be build by using the Indicator Builder.
In Metastock v6.5:
NAME Random Walk Index [6.5] High
SYNTAX rwih( PERIODS )
FUNCTION Calculates the predefined Random Walk Index of the highs indicator.
EXAMPLE rwih( 21 )
NAME Random Walk Index [6.5] Low
SYNTAX rwil( PERIODS )
FUNCTION Calculates the predefined Random Walk Index of the lows indicator.
EXAMPLE rwil( 21 )
Parameters v6.5
Standard Time Periods ST = 9
Standard Time Periods LT = 70
Standard Indicator Color = High: Red,Solid and Low: Red,Dotted
Standard Horizontal Line = 1.0, Black/Blue
Note that by DEFAULT the v6.5 buildin is set to 9 for the periods used for both functions, and when 'dragged' from the Indicator Builder to the chart, both will be promptly plotted as the 1 indicator in their inner window.
In Metastock v6.x: 

Random Walk Index [6.0] High
This is the ST 9day version of the RWI. Color High: Red,Solid and the Low: Red, Dotted.
Horizontal line at 1.0(Black/Blue)}
{Standard Horizontal Line = 1.0, Black/Blue}
Max( (HIGH Ref(LOW,1)) / ( (Ref(Sum(ATR(1),2),1) / 2)*Sqrt(2) ),
Max( (HIGH Ref(LOW,2)) / ( (Ref(Sum(ATR(1),3),1) / 3)*Sqrt(3) ),
Max( (HIGH Ref(LOW,3)) / ( (Ref(Sum(ATR(1),4),1) / 4)*Sqrt(4) ),
Max( (HIGH Ref(LOW,4)) / ( (Ref(Sum(ATR(1),5),1) / 5)*Sqrt(5) ),
Max( (HIGH Ref(LOW,5)) / ( (Ref(Sum(ATR(1),6),1) / 6)*Sqrt(6) ),
Max( (HIGH Ref(LOW,6)) / ( (Ref(Sum(ATR(1),7),1) / 7)*Sqrt(7) ),
Max( (HIGH Ref(LOW,7)) / ( (Ref(Sum(ATR(1),8),1) / 8)*Sqrt(8) ),
Max( (HIGH Ref(LOW,8)) / ( (Ref(Sum(ATR(1),9),1) / 9)*Sqrt(9)),0))))))))


Random Walk Index [6.0] Low
{This is the ST 9day version of the RWI. For High: Red, Solid and the Low: Red, Dotted.
Horizontal line at 1.0(Black/Blue)}
Max( (Ref(HIGH,1) LOW) / ( (Ref(Sum(ATR(1),2),1) / 2)*Sqrt(2) ),
Max( (Ref(HIGH,2) LOW) / ( (Ref(Sum(ATR(1),3),1) / 3)*Sqrt(3) ),
Max( (Ref(HIGH,3) LOW) / ( (Ref(Sum(ATR(1),4),1) / 4)*Sqrt(4) ),
Max( (Ref(HIGH,4) LOW) / ( (Ref(Sum(ATR(1),5),1) / 5)*Sqrt(5) ),
Max( (Ref(HIGH,5) LOW) / ( (Ref(Sum(ATR(1),6),1) / 6)*Sqrt(6) ),
Max( (Ref(HIGH,6) LOW) / ( (Ref(Sum(ATR(1),7),1) / 7)*Sqrt(7) ),
Max( (Ref(HIGH,7) LOW) / ( (Ref(Sum(ATR(1),8),1) / 8)*Sqrt(8) ),
Max( (Ref(HIGH,8) LOW) / ( (Ref(Sum(ATR(1),9),1) / 9)*Sqrt(9)),0))))))))




Note that for both the High+Low as functions or as indicators "friendly error messages are returned regarding the division of "0". This is very common in the program and in this they can be ignored. These "friendlies" will not affect their functioning, values, output or readings. 

Random Walk Index [6.0] LT High
{This is the LT 50day version of the RWI. Color High: Red,Solid and the Low: Red, Dotted.
Horizontal line at 1.0(Black/Blue)}
SUM(
Max( (HIGH Ref(LOW,1)) / ( (Ref(Sum(ATR(1),2),1) / 2)*Sqrt(2) ),
Max( (HIGH Ref(LOW,2)) / ( (Ref(Sum(ATR(1),3),1) / 3)*Sqrt(3) ),
Max( (HIGH Ref(LOW,3)) / ( (Ref(Sum(ATR(1),4),1) / 4)*Sqrt(4) ),
Max( (HIGH Ref(LOW,4)) / ( (Ref(Sum(ATR(1),5),1) / 5)*Sqrt(5) ),
Max( (HIGH Ref(LOW,5)) / ( (Ref(Sum(ATR(1),6),1) / 6)*Sqrt(6) ),
Max( (HIGH Ref(LOW,6)) / ( (Ref(Sum(ATR(1),7),1) / 7)*Sqrt(7) ),
Max( (HIGH Ref(LOW,7)) / ( (Ref(Sum(ATR(1),8),1) / 8)*Sqrt(8) ),
Max( (HIGH Ref(LOW,8)) / ( (Ref(Sum(ATR(1),9),1) / 9)*Sqrt(9)),
0)))))))),40)


Random Walk Index [6.0] LT Low
{This is the LT 50day version of the RWI.
For High: Red,Solid and the Low: Red, Dotted.
Horizontal line at 1.0(Black/Blue)}
SUM(
Max( (Ref(HIGH,1) LOW) / ( (Ref(Sum(ATR(1),2),1) / 2)*Sqrt(2) ),
Max( (Ref(HIGH,2) LOW) / ( (Ref(Sum(ATR(1),3),1) / 3)*Sqrt(3) ),
Max( (Ref(HIGH,3) LOW) / ( (Ref(Sum(ATR(1),4),1) / 4)*Sqrt(4) ),
Max( (Ref(HIGH,4) LOW) / ( (Ref(Sum(ATR(1),5),1) / 5)*Sqrt(5) ),
Max( (Ref(HIGH,5) LOW) / ( (Ref(Sum(ATR(1),6),1) / 6)*Sqrt(6) ),
Max( (Ref(HIGH,6) LOW) / ( (Ref(Sum(ATR(1),7),1) / 7)*Sqrt(7) ),
Max( (Ref(HIGH,7) LOW) / ( (Ref(Sum(ATR(1),8),1) / 8)*Sqrt(8) ),
Max( (Ref(HIGH,8) LOW) / ( (Ref(Sum(ATR(1),9),1) / 9)*Sqrt(9)),
0)))))))),40) 



System
Mr. Poulus feels that an effective trading system could be built that opens trades (after shortterm pullbacks against the direction of the longterm trend) using the following guidelines:
Enter long (or close short) when the longterm RWI of the highs is greater than 1.0, and the shortterm RWI of lows peaks above 1.0.
Enter short (or close long) when the longterm RWI of the lows is greater than 1.0, and the shortterm RWI of highs peaks above 1.0. 

Source / From: 
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