The Random Walk Index is based upon the concept of the shortest distance between two points is a straight line. The further prices stray from that straight line within a given time, the less efficient the movement. The more random the movement, the greater the RWI fluctuates.
To effectively use the RWI, it is recommended to have 2 to 7 periods for the short term and 8 to 64 periods for the long term. This is to illustrate the randomness of the short term and the trends of the long term. In the short term, peaks of RWI highs correlate with peaks in price. Peaks of RWI lows correlate with drops in price.
In the long term, peaks of RWI highs above 1.0 illustrate a strong uptrend. Peaks of RWI lows above 1.0 illustrate a strong downtrend.
A trading system using this index would be enter long (or close short) when the long-term RWI of highs is greater than 0 and short term RWI of lows rises above 1.0. Likewise, when the long-term RWI of the lows is greater than 1.0 and the short-term RWI of highs rises above 1.0, enter short (or close long).
||The number of bars used to calculate the Random Walk Index.|
||The lower line of the Random Walk Index.|
||The higher line of the Random Walk Index.|
||The middle line of Random Walk Index.|
*For illustrative purposes only. Not a recommendation of a specific security or investment strategy.