Relative Momentum Index for Overbought and Oversold Reversals

Summary

The Relative Momentum Index adapts the RSI idea by measuring price change over a configurable multi-period lookback rather than only comparing adjacent closes. It separately smooths positive and negative momentum, forms their ratio, and normalizes the result to a 0–100 oscillator. The described reversal rules go long below a lower threshold and short above an upper threshold; the document also notes an option to reverse those signals. Example settings and a short published backtest configuration are included, but no performance results are reported.

The strategy seeks short-term pullbacks and is presented as more responsive than RSI. Its main caveat is that overbought or oversold readings can persist or be overwhelmed during strong trends, producing losing reversal entries. Results also depend on lookback and threshold choices, which may need adjustment for each market. The document suggests adding stop losses, combining the oscillator with trend filters, and selecting suitable trading sessions, but offers no evidence that these changes improve performance.

Key ideas

• RMI compares price with its value several periods earlier and smooths gains and losses separately.
• The normalized momentum ratio produces an oscillator used to identify overbought and oversold conditions.
• The basic rules short above an upper threshold and go long below a lower threshold.
• Strong trends can make reversal signals fail, and parameter choices may not transfer across markets.
• Stop losses and trend filters are proposed as safeguards, not demonstrated improvements.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.