CUTLER Relative Strength Index

While the formula for Cutler's RSI is similar to Wilder's RSI, the calculation of the average gain and average loss is done differently. Cutler's RSI uses a linear regression model to estimate the average gain

LIDERBOT

2/4/20243 min read

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chart trading

The Relative Strength Index (RSI) is a widely used technical indicator that measures the strength and momentum of a price trend. It was developed by J. Welles Wilder and has become an important tool for traders and investors in analyzing market conditions.

However, there is another version of the RSI called the Cutler Relative Strength Index, which uses simple arithmetic means. While everything stated for the Welles RSI is valid for Cutler's RSI, the question arises as to which one provides better results. To determine this, it is necessary to use optimization methods.

In general terms, the Welles Wilder Relative Strength Index is usually considered more effective. Let's explore the reasons behind this.

Understanding the Relative Strength Index (RSI)

The Relative Strength Index is a momentum oscillator that measures the speed and change of price movements. It is calculated using a formula that compares the average gain and average loss over a specified period of time.

The RSI ranges from 0 to 100 and is typically displayed as a line graph. Values above 70 are considered overbought, indicating a potential reversal or correction in price. Conversely, values below 30 are considered oversold, suggesting a potential upward movement in price.

Welles Wilder Relative Strength Index

J. Welles Wilder introduced the Relative Strength Index in his book "New Concepts in Technical Trading Systems" in 1978. His version of the RSI is widely used and has stood the test of time.

Wilder's RSI is calculated using the following formula:

RSI = 100 - (100 / (1 + RS))

Where RS is the average gain divided by the average loss over a specific period of time. The default period used is typically 14 days.

Wilder's RSI is known for its ability to identify overbought and oversold conditions in the market. Traders often use it to generate buy and sell signals, as well as to confirm the strength of a trend.

Cutler Relative Strength Index

The Cutler Relative Strength Index, named after its creator David S. Cutler, is an alternative version of the RSI that uses simple arithmetic means.

While the formula for Cutler's RSI is similar to Wilder's RSI, the calculation of the average gain and average loss is done differently. Cutler's RSI uses a linear regression model to estimate the average gain and average loss over a specified period of time.

While Cutler's RSI may provide similar results to Wilder's RSI, it is generally considered less effective. This is because the linear regression model used in Cutler's RSI may not accurately capture the true trend and momentum of the price movements.

Furthermore, the optimization methods used for determining the effectiveness of Cutler's RSI compared to Wilder's RSI are inconclusive. There is no clear consensus on which version of the RSI is better.

Conclusion

In conclusion, the Welles Wilder Relative Strength Index is usually considered more effective than the Cutler Relative Strength Index. Wilder's RSI has a proven track record and is widely used by traders and investors.

However, it is important to note that the effectiveness of any technical indicator, including the RSI, may vary depending on the market conditions and the specific trading strategy employed. It is always recommended to use multiple indicators and analysis techniques to make informed trading decisions.

Ultimately, the choice between using Wilder's RSI or Cutler's RSI depends on individual preferences and trading style. Traders are encouraged to experiment and find the indicator that works best for their needs.

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