Modified RSI (Mod RSI) works just like a normal RSI calculation with one exception. It has a unique calculation that optimizes a standard 14-period RSI setting to a new calculation based on the unique pivot point price swing movements being analyzed and number of data bars involved in those swing movements. The objective of this Mod RSI calculation value is to find traditional RSI oversold/overbought conditions or RSI buy or sell hook setups with new settings tailored to work best with the data being analyzed.
The Mod RSI uses for its default setting Pivots = 6 and Type = Medium.
To experiment with other settings, go back to the Modified RSI menu and enter other values.
In the following example we are looking to trade the Bucyrus International (BUCY) and will be using the RSI indicator for helping to identify traditional buy/sell setups or overbought/oversold signals.
The standard RSI uses a 14 setting to generate results. If we want to use the EduTrader Mod RSI to generate potential better or more usable insights we would modify the settings. The only change we will make in this example is to go into the Mod RSI menu and change the "Type" setting to “Weak” to see how this changes the calculation.
The results shown below show a slight adjustment in the calculation from a 14 to a 10 Mod RSI setting. Both the standard RSI and the Mod RSI are generating respectable signals but you can see the Mod RSI has a little more clarity in the divergence patterns, and more distinction when approaching the oversold /overbought range. If you were using a Mod RSI to trade BUCY you would have greater confidence in using the new RSI setting to help you in your trading.
What are Pivot Points?
Pivot points are support and/or resistance levels on charts that are extremely useful in developing entry or exit strategies in trading. They have been used for decades in technical analysis to identify locations where price swings have occurred in the past. If market is range bound or trending this information can be used to help identify was to trade that behavior.
How EduTrader Uses Pivot Points in the Modified Stochastic calculation?
The Mod RSI calculates the length of data bars used from one pivot to another. It then adds those data bars up and divides by the number of pivot points used in the calculation to get a new RSI average. In this calculation the actual price pivot point ends up getting counted twice, where it is included in the end of a pivot length calculation, and becomes the beginning data bar
to count in the new pivot to next pivot calculation.
Using Barrick Gold (ABX) as an example, we calculate ABX minor pivots and using a total of 6 minor pivots in the calculation. If we add twice the pivot points we get a total of 28 data bars. Divided 28 by 6 (pivots) and we get 4.666 which we round up to 5. This is how come the new Mod RSI would pick 5 for its new calculation value.
To learn more about using Stochastic as a technical analysis trading tool, go to the Stochastic page.
Menu Functions
Settings
The Default Pivots is 6. This value can be changed by clicking in the respective box and changing the value. The Type of Pivots used can be selected from Weak, Medium, and Strong. As well the Use All Check box can be selected to use all the Pivots.
Display
The Display Type can be set to one of the following options: Line, Line with Bands, Line with Bands and Shading, Line with Shading.
Line
The Color selection allows the user to change the color of the band & the Thickness selector allows the user to change the thickness of the band displayed.
Bands
The default Upper Band is set at 70 while the Lower band is set at 30. These values can be changed by clicking in their respective boxes and changing the values. The Color selection allows the user to change the color of the band displayed.
To save your modified settings to be applied to future charts, click Save As Default. Once this is clicked at all times in the future the settings you have set will be applied to future charts when this study is added.
To return to the Factory Settings, click Factory Settings and then click Save As Default. Once this done at all times in the future the Factory Settings will be applied to future charts when this study is added.
Click Ok to apply the Modified RSI to the selected chart or click Cancel or Remove to exit the study without applying it.
Click Remove to remove the study from the selected chart.