RWI - Random Walk Index

Random Walk Index (RWI) was created by Michael Poulos and published in September 1992 in "Technical analysis of Stocks and Commodities". It is a trend indicator - similar to ADX or Aroon. Its aim is to find out whether the price move is just random and choppy or a significant trend is just being formed. It separates the ranging market from the trending one.  The indicator takes into consideration the real price movement during "n" time periods and compares it to a "random walk" movement where no significant trend is prevailing.

Michael Poulos has realized that the shortest way between two points is a straight line. The more the prices differ from this straight line, the more is the market choppy, without any trend.

Random Walk Index calculation:

MAX (0-n) [RWI low = ((High -(n-1)) - (Low)) / (ATR x √n)]

MAX (0-n) [RWI high = (High) - (Low -(n-1)) / (ATR x √n)]

In other words: you have to find out the highest value of [RWI low = ((High -(n-1)) - (Low)) / (ATR x √n)] during "n" chosen periods ago. The same applies to RWI high. The highest value of RWI becomes the RWI value for the current day.

RWI high and RWI low are calculated for two different periods. They are calculated for one short and one long period. For the short RWI it is recommended to calculate the indicator from 2-7 days period. For the long RWI is recommended to use 8-64 days RWI. Long-term RWI high above 1 means Uptrend. Long-trend RWI low above 1 means Downtrend.

How to use RWI:

Poulos discovered that this indicator gives very good Buy signals when long-term RWI high is above 1 while short-term RWI low peaks above 1, as well. The opposite is true for Sell signals. We sell when the long-term RWI low is above 1 and short-term RWI low peaks above 1, too.