Random Walk Index (RWI)

What Is the Random Walk Index (RWI)?

The random walk index (RWI) is a technical indicator that compares a security's price movements to random movements with an end goal to determine on the off chance that it's in a statistically huge trend. It tends to be utilized to produce trade signals in light of the strength of the underlying price trend.

Understanding the Random Walk Index (RWI)

The random walk index (RWI) was made by Michael Poulos to determine on the off chance that a security's current price action is displaying "random walk" or is the consequence of a statistically critical trend, higher or lower.

Random walk alludes to market or security movements that are inside the domain of statistical "commotion" levels and not steady with a confirmed or determinable trend. The technical indicator was initially distributed in Technical Analysis of Stocks and Commodities magazine in a 1990's article named, "Of Trends And Random Walks."

Market trend and random walk studies return for quite a long time, highlighted by R.A. Stevenson's publication of "Product Futures: Trends or Random Walks?" in the March 1970 issue of The Journal Of Finance.

William Feller, a mathematician who had some expertise in probability theory, proved that the limits of randomness, otherwise called displacement distances, could be calculated by taking the square foot of the number of binary events, which allude to two-sided results with equivalent likelihood (like a coin throw). Sensibly talking, any movement outside of these limits recommends the movement isn't intrinsically random in nature. The RWI applies these mathematical principles while measuring a uptrend and downtrend to determine on the off chance that it's random or statistically meaningful.

RWI and average directional index (ADX) look very comparable and, as a matter of fact, are very comparable. The average directional index (ADX) is made out of directional movement lines (DI+ and DI-) which move in fundamentally the same as ways to the RWI Low and High. The ADX is a third line on the ADX indicator and shows the strength of the trend. Readings over 25 show a strong trend.

Random Walk Index Calculation

Since the indicator measures both uptrend and downtrend strength, the indicator has two lines and requires separate calculations for both.

The calculation for high periods, or RWI High, is:
$\begin &\text = \frac { \text - \text_n}{ \text \times \sqrt } \ &\textbf \ &n = \text \ &\text = \text \ \end$

As such, in the event that you're working out the RWI High of the last five days, take the high from today minus the low from the prior period and compute RWI High. Then ascertain utilizing the present high minus the low two days prior. Do this for every day returning five trading meetings.

Your RWI High value is the highest value of the last five days or for however numerous periods (n) were picked.

RWI Low is calculated as follows:
$\begin &\text = \frac { \text_n - \text }{ \text \times \sqrt } \ \end$

The method is like the approach above, with the exception of now we will utilize the present low and the high from the prior period to make the primary calculation. Then, at that point, utilize the high from two days prior. Do this for every one of the n periods. The RWI Low value is the lowest number of the n calculations completed.

Every day (or period) the calculations are completed once more.

Random Walk Index Trading

The random walk index is normally involved north of two to seven periods for short-term trading and scalping and eight to 64 periods for long-term trading and investments. Market players might wish to explore different avenues regarding these settings to determine what turns out best for their overall strategies.

Readings above 1.0 demonstrate that a security is trending higher or lower, while readings below 1.0 propose that a security might move randomly. In the event that RWI Low is over one, it shows a strong downtrend; in the event that RWI High is over one, it demonstrates a strong uptrend.

As a rule, traders and market clocks will enter long positions when a long-term RWI High is greater than 1.0 and the short-term RWI Low is likewise above 1.0. This means the trader tracks two RWI calculations, a longer-term one, say 64-periods, and a short-term one, say seven-periods.

A trader purchases when the long-term RWI High is above 1.0, which demonstrates a long-term strong uptrend, yet the short-term RWI Low is likewise above 1.0, showing that in the short term the price has dropped, giving a great entry into the long-term uptrend.

Short positions might be entered when the long-term RWI Low is greater than 1.0 and the short-term RWI High tops over one also.

A few traders might hope to utilize crossovers of the two lines to show expected trades. This will function admirably when strong trends grow, yet it will bring about heaps of losing trades in the event that the price doesn't trend well since hybrids could happen without a strong trend coming about. All things considered, a few traders might wish to use this approach, possibly related to different forms of technical analysis.

Random Walk Index Example

The daily chart of Apple Inc. (AAPL) has a 30-period RWI indicator applied to it.

At the point when the price is falling the red line, or RWI Low, is on top.

At the point when the price is rising the green line, or RWI High, is on top.

At the point when both of these lines is over one, the black horizontal line, it shows a strong trend.

On the left, there is a strong uptrend. The RWI High moves above 1.0, and the RWI Low is below 1.0.

Then, at that point, a strong downtrend starts. The RWI Low moves above 1.0, and the RWI High is well below 1.0.

This is followed by another uptrend with comparable conditions to the prior uptrend.

Then, at that point, the stock enters a weak trending period. Neither the RWI Low or High keeps up with its position above 1.0 for a really long time. For a concise period, the two lines even become tangled around the zero mark, signaling an exceptionally weak trend, or choppy trading, in the two bearings.

Random Walk Index Limitations

The RWI is a lagging indicator. It involves past data in its calculation and there isn't anything intrinsically predictive about it. While the indicator can move over one to signal a strong trend, it can without much of a stretch slip back below one rapidly. It can likewise go from a weak trend to a strong trend with little cautioning from the indicator.

Waiting for the indicator to move over one before steering a trade that way can some of the time bring about a poor entry. The price has already been moving that way for quite a while and might be ready to reverse or enter a pullback.

The random walk index is best utilized related to price action analysis or different forms of technical analysis.

Highlights

• At the point when the RWI High is over the RWI Low, it means there is more vertical strength than descending strength and vice versa.
• The random walk index compares a security's price movements to a random sampling to determine on the off chance that it's taken part in a statistically critical trend.
• When either the RWI High or RWI Low is over one, it demonstrates a strong, non-random, trend is available though readings below one mean movement could be random since there isn't sufficient strength to show otherwise.
• The random walk index has two lines, a RWI High and a RWI Low, which measure uptrend and downtrend strength.