Cyclic RSI: The Indicator That Redefines Market Timing

In the ever-evolving world of trading, finding reliable tools is key to staying ahead. One such tool that’s making waves is the Cyclic RSI.

While the traditional RSI (Relative Strength Index) has long been a staple, its newer counterpart brings fresh opportunities.

Cyclic RSI adapts to market cycles, offering dynamic signals for enhanced strategy development.

Cyclic RSI’s ability to adapt to market conditions reduces noise and enhances decision-making, making it an excellent starting point for beginners, for building effective trading strategies.

Let’s dive into how this innovative indicator can be used to refine trading techniques and boost performance.

What is Cyclic RSI?

Cyclic RSI is a modern twist on the classic RSI indicator. Unlike traditional RSI, which uses static levels like 70 (overbought) and 30 (oversold), Cyclic RSI dynamically adjusts these thresholds based on market cycles.

This makes it more responsive to market rhythms, offering traders improved entry and exit points, and potentially enhancing accuracy.

The Concept Behind Cyclic RSI

The Cyclic RSI is rooted in concepts discussed in the book Decoding The Hidden Market Rhythm by Lars Von Thienen. This approach emphasizes adapting technical indicators to align with natural market cycles.

" The indicator is not just a tweak of the RSI; it's a totally new idea to build the RSI indicator."

Ali Casey

A trading chart comparing traditional RSI and Cyclic RSI. Static overbought/oversold levels of RSI are contrasted with Cyclic RSI’s dynamic bands, highlighting their adaptability to market cycles.

Key Parameters of Cyclic RSI

Cyclic RSI introduces three main parameters:

1.   Dominant Cycle: Determines the primary market rhythm influencing the indicator.

2.   Vibration: Fine-tunes the sensitivity to smaller price movements.

3.   Leveling: Adjusts the signal’s frequency by expanding or contracting thresholds.

These parameters allow traders to customize the indicator, ensuring it aligns with their specific strategy.

Challenges When Using Cyclic RSI

While Cyclic RSI offers significant advantages, it’s not without its challenges. Beginners may find parameter optimization, such as adjusting the dominant cycle, vibration, and leveling, to be complex initially.

Additionally, improper backtesting can lead to overfitting, where a strategy performs well in historical data but fails in real-world conditions. Proper testing and cautious tuning are essential for reliable results.

Testing Environment:

The S&P 500 index serves as an excellent testing environment thanks to its high liquidity and stable market behavior over time.

• Market: S&P500 Emini futures

• Fees: no commission or slippage, trading fixed 1 contract

• Historical data: 2006-2024

• Buy signal: Cyclic RSI cross Below Lower Threshold (green)

• Sell signal: Cyclic RSI cross Above Upper Threshold (red)

• Optimization: Optimizing all three inputs for a total of +1800 combinations

A trading platform interface with input fields for Cyclic RSI parameters: dominant cycle, vibration, and leveling. A preview table shows multiple strategy variations.

Incorporating Cyclic RSI into Strategies

To build a robust trading strategy with Cyclic RSI:

1.   Identify Key Parameters: Optimize the dominant cycle, vibration, and leveling.

2.   Set Dynamic Entry/Exit Rules: buy when Cyclic RSI crosses below the lower threshold and sell above the upper threshold.

3.   Add Filters: Combine with volatility or trend indicators for refined signals. For example, a trader might use Cyclic RSI in combination with a 20-day moving average filter. Trades would only trigger when Cyclic RSI indicates a buy signal, and the price is above the moving average, ensuring trades align with the prevailing trend.

Performance Comparison: Cyclic RSI vs. RSI

Backtesting reveals that Cyclic RSI slightly outperforms traditional RSI. But (more importantly) it produces a different equity curve. By fixing parameters of classic RSI and Cyclic RSI and only adding filters we get diverse equities even when using same filters

A table comparison chart for Cyclic RSI and traditional RSI strategies on the S&P 500 with and without strategy filters. It illustrates the distinct metrics of each strategy, emphasizing the performance diversification achieved with Cyclic RSI.

Correlations in Portfolio Management

Correlation measures the relationship between two variables, indicating how changes in one are associated with changes in the other.

One of Cyclic RSI’s standout features is its ability to produce different equity curve than standard RSI. With its dynamic nature, Cyclic RSI strategies often exhibit relatively low correlation to traditional RSI strategies even when using same strategy filter, making them excellent additions to multi-strategy portfolios.

A correlation matrix showcasing the relationships between Cyclic RSI strategies and traditional RSI strategies. The visualization highlights lower correlation coefficients for Cyclic RSI, emphasizing its role in portfolio diversification.

" The main thing is Cyclic RSI produce a different equity curve than traditional RSI, which is valuable when building a portfolio."

Ali Casey

A portfolio diversification key figures with an annual performance table showcasing power of portfolios.

Conclusion

I am always eager to explore new indicators that are built on the same robust concept, yet capable of producing different equity curves. In my experience, it’s far more effective to trade 10 micro futures contracts using 5 relatively correlated strategies than to rely on a single mini futures contract with one strategy.

Cyclic RSI’s dynamic approach to overbought and oversold levels makes it a superior addition to traditional RSI. By incorporating it into your strategies, you can unlock new opportunities, reduce correlation, and enhance portfolio performance. With its adaptability and versatility, Cyclic RSI empowers traders to create smarter, more diverse strategies that thrive in any market condition.

Whether you’re a beginner or an experienced trader, Cyclic RSI is a valuable addition to your indicator arsenal.

FAQs on Cyclic RSI

What makes Cyclic RSI different from RSI?

Cyclic RSI uses dynamic thresholds based on market cycles, unlike RSI’s static levels.

How does Cyclic RSI compare to other dynamic indicators?

Cyclic RSI focuses on dynamically adjusting thresholds based on market cycles, making it highly responsive. In contrast, indicators like stochastic oscillators use fixed periods to measure price momentum, which can result in lagging signals in volatile markets. Cyclic RSI’s adaptability often provides a more accurate reflection of market conditions.

Can Cyclic RSI work for all markets?

Yes, it’s adaptable to stocks, forex, and futures, provided the parameters are optimized.

How do I optimize Cyclic RSI?

Start by testing different values for the dominant cycle, vibration, and leveling parameters.

Does Cyclic RSI reduce trading risk?

While no tool eliminates risk, its adaptability can improve signal reliability and portfolio diversification.

Can beginners use Cyclic RSI?

Absolutely! Its user-friendly nature and versatility make it suitable for traders of all levels.

Is Cyclic RSI compatible with algo trading?

Yes, it integrates seamlessly into automated trading systems.

What platforms support Cyclic RSI?

The book provides the code for MetaTrader, TradingView and NinjaTrader. My Code support TradeStation and Multicahrts.