Upgrading the PSY Indicator with Price Change and Volume
Summary
The document develops the Psychological Line (PSY), an indicator that measures the share of rising bars over a lookback period, into a directional strength measure. The basic count treats every up or down bar equally, so it misses the size of price moves. The first modification weights each bar by the absolute change in closing price; the next also weights that change by trading volume, on the premise that heavier volume can confirm momentum.
It proposes threshold and change-based signals, then illustrates a simple strategy: enter long above a high PSY threshold and exit below a low one, with the reverse logic for shorts. The article reports tests on BTC-USDT and ETH-USDT perpetual contracts over a specified historical period and describes positive expected returns in volatile markets. It provides no detailed performance statistics in the text, and the evidence is limited to a simple backtest with fixed settings. The modified indicator is presented as a candidate for further testing, including alternative signals and broader factor evaluation.
Key ideas
- Basic PSY measures the proportion of rising bars in a chosen lookback window.
- Weighting price changes by their magnitude distinguishes small moves from large ones.
- Adding volume gives larger weight to sizable moves that occur during more active trading.
- Thresholds or changes in the indicator can form momentum or reversal signals.
- The reported crypto perpetual backtests are illustrative and do not establish broad or out-of-sample performance.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.