Upgrading the PSY Indicator with Price-Move and Volume Weights
Summary
The article develops the Psychological Line (PSY), an indicator that counts rising bars over a lookback, into a measure intended to better represent the balance of buying and selling pressure. It notes that a simple count treats a small rise like a large one, then proposes weighting price direction by the absolute size of each bar’s change. A further version weights those changes by volume, on the premise that heavier trading can strengthen confirmation of the move. The resulting factor can be used with fixed thresholds or comparisons to its prior value or moving average to create momentum or reversal signals.
The author reports a simple backtest on BTC-USDT and ETH-USDT contracts using a 12-period setting over a stated 2020–2021 sample, with specified slippage, fees, leverage, and position allocation. The article says the approach captured some momentum in volatile markets and had positive expected returns, but the supporting charts are not reproduced in the text. It gives no detailed benchmark, robustness analysis, or out-of-sample evidence, so the results do not establish that the factor generalizes.
Key ideas
- Basic PSY measures the fraction of bars that closed higher within a selected lookback.
- Weighting each bar by the absolute price change accounts for move size as well as direction.
- Adding volume aims to give more influence to price moves that occur with greater trading activity.
- Threshold and self-comparison rules can turn the factor into momentum or reversal signals.
- The reported backtest is limited to two crypto contracts and does not establish out-of-sample robustness.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.