Discover more from All About Trading!
The Neutrality Rejection Trading Technique
Creating the Neutrality Rejection Technique in TradingView
This article presents a technique to be used on the RSI. A trading technique is a way of using an indicator. For example, the oversold and overbought technique is the simplest way of using the RSI. Similarly, divergences are also a technique to be used with different technical indicators. The neutrality rejection technique is an interesting concept born out of empirical experience.
The Relative Strength Index — An Introduction
The Relative Strength Index (RSI) is a technical analysis indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in an asset. It was created by J. Welles Wilder, a technical analyst, in 1978.
The RSI compares the average gains and losses of an asset over a given period, typically 14 days, and presents the results on a scale of 0 to 100. A reading above 70 is generally considered overbought, indicating that the asset may be due for a price correction or a reversal. Conversely, a reading below 30 is generally considered oversold, indicating that the asset may be due for a price rebound or a reversal.
Traders use RSI to identify potential trend reversals or confirm existing trends. For example, when an asset’s RSI value is in overbought territory, it may suggest that the asset is likely to experience a price correction or a reversal, indicating a sell signal. Conversely, when an asset’s RSI value is in oversold territory, it may suggest that the asset is likely to experience a price rebound or a reversal, indicating a buy signal.
Overall, the RSI is a popular technical analysis tool used by traders and investors to evaluate the momentum of an asset and to generate trading signals.
For a detailed and thorough collection of trend following trading strategies, you can check out my book. The book features a huge number of classic and modern techniques as it dwelves into the realm of technical analysis with different trading strategies. The book comes with its own GitHub.
Trend Following Strategies in Python: How to Use Indicators to Follow the Trend
Amazon.com: Trend Following Strategies in Python: How to Use Indicators to Follow the Trend.: 9798756939620: Kaabar…amzn.to
The Neutrality Rejection Technique
The theory stats that whenever the RSI surpasses 50% (neutrality), it is a bullish signal and when it breaks 50%, it is a bearish signal. In reality, this is rarely the case. Hence, the neutraliry rejection technique has been born.
I have noticed that more often than note when the RSI breaks or surpasses 50%, it re-integrates it and shapes the inverse move. Thus, the theory does not really work in real life and this is the main hypothesis of the neutrality rejection technique. The trading conditions are as follows:
A long signal is detected whenever the RSI re-surpasses 50% after being below it for only one period.
A short signal is detected whenever the RSI re-breaks 50% after being above it for only period.
The following Figure shows the signals generated by the technique:
More signals are shown in the following chart:
The code in Pine Script is as follows:
// This source code is subject to the terms of the Mozilla Public License 2.0 at https://mozilla.org/MPL/2.0/ // © Sofien-Kaabar //@version=5 indicator("The Neutrality Rejection Technique", overlay = true) lookback = input(defval = 13, title = 'Lookback') rsi = ta.rsi(close, lookback) buy = rsi > 50 and rsi < 50 and rsi > 50 and rsi > 50 sell = rsi < 50 and rsi > 50 and rsi < 50 and rsi < 50 plotshape(buy, style = shape.triangleup, color = color.green, location = location.belowbar, size = size.small) plotshape(sell, style = shape.triangledown, color = color.red, location = location.abovebar, size = size.small)