Range Expansion Index (REI): The Indicator Traders Are Missing Out On

TLDR Summary:

• REI uses intraday high and low data instead of closing prices.

• Produces significantly different signals compared to RSI.

• Proven profitable performance on SPY, QQQ, and DIA from 1998 to present.

• Easy optimization and robust strategy performance.

• Enhances diversification in trading portfolios.

Many traders rely on RSI for their mean reversion strategies but feel frustrated with its recent performance. This happens because RSI primarily considers closing prices, often missing valuable insights hidden within intraday price movements.

A powerful yet overlooked alternative is the Range Expansion Index (REI). Developed by trading expert Thomas Demark, REI leverages intraday high and low prices instead of closing prices. By analyzing intraday volatility, REI generates clearer signals and significantly enhances your trading edge.

What is the Range Expansion Index (REI)?

The Range Expansion Index (REI), created by Thomas Demark, is a momentum oscillator that evaluates market momentum by analyzing the intraday range—the difference between each trading session’s high and low prices.

Traditional indicators like RSI typically rely on closing prices, thus overlooking crucial intraday price action. Additionally, many conventional momentum indicators use exponential smoothing, meaning large price moves can disproportionately distort historical data, though this effect diminishes over time.

REI directly addresses these issues by specifically focusing on intraday high and low ranges. This intraday-based approach produces clearer, more accurate trading signals, making REI particularly effective for mean reversion and other short-term trading strategies.

For a detailed visual explanation and practical examples of REI in action, watch this short video: Stop Using RSI 👀 Use This SECRET Indicator Instead.

"Indicators complement your edge—REI provides fresh angles and stronger signals for mean reversion strategies." – Ali Casey

Understanding REI: How It Works (Without Complex Math!)

The REI oscillates between -100 and +100, reflecting the relationship between intraday high and low ranges over a lookback period.

Alt Text: "REI indicator on SP500 daily chart."

REI vs. RSI: Spotting Key Differences

Comparing REI with RSI, you'll immediately notice:

• Distinctive signals due to intraday focus.

• Reduced similarity in equity curves with other oscillators, leading to valuable portfolio diversification.

Alt Text: "Comparison chart showing RSI and REI indicators highlighting differences in entry and exit signals based on intraday price data."

Building a Strategy with REI: Step-by-Step Guide

Here's how to effectively implement an REI-based strategy:

• Define a clear edge (e.g., mean reversion on major indices).

• Select optimal entry and exit points based on REI crossing threshold values.

Real-World Performance: REI Strategy on S&P500 Index

Testing from January 1998 to May 2025 demonstrated consistent profitability using REI on the S&P 500 index (via SPY ETF).

Alt Text: "Equity curve demonstrating consistent growth from 1998 to 2025 using the REI strategy on SPY ETF."

Below are performance metrics comparing classic RSI2 and REI strategies on major U.S. indexes through ETFs:

Alt Text: "Performance metrics comparing traditional RSI2 and REI strategies, displaying net profit, average trade, win rate, and drawdown."

Optimizing REI: Finding the Best Settings

Optimal parameters typically range:

• Lookback period: 2–8 bars

• Overbought/Oversold thresholds: Customized via 3D optimization analysis

The 3D chart shows almost all optimization values above $100K in net profit.

Alt Text: "3D heatmap illustrating profitable combinations of REI lookback periods and threshold settings, emphasizing areas yielding high net profit."

Enhancing REI with Filters

REI performance can be further enhanced by adding a strategy filter such as direction, volatility, or volume etc.

• improves the return-to-drawdown ratio.

• Reduces false signals and optimizes entries.

To further sharpen your edge, pair REI with volume-based indicators such as the Volume Oscillator, which identifies stronger trade confirmations and reduces false signals. (Learn more about the Volume Oscillator) [https://statoasis.com/post/volume-oscillator-a-beginner-s-secret-to-smarter-trades].

Diversification and Robustness: Using REI with RSI and multiple markets

Combining REI and RSI can significantly reduce drawdowns. Additionally, integrating volatility insights from the VIX index allows for dynamic strategy adjustments during turbulent market conditions. Read more about VIX here.

Check below the annual metrics for RSI and REI strategies on SPY and how they don’t behave the same way.

Alt Text: "Annual returns chart contrasting REI and RSI strategy performance, highlighting diversification benefits and distinct drawdown periods."

Testing exact rules on other markets produced excellent results without any optimizations or strategy filters. To test on other markets, I picked the top 5 ETFs from 5 categories based on market capitalization.

"Diversification through indicators like REI stabilizes results." – Ali Casey

Alt Text: "Table displaying strong REI performance metrics across diverse ETFs in different asset classes."

Common Pitfalls & Mistakes to Avoid

• Ignoring optimization.

• Overfitting without robustness testing.

Avoid overfitting by conducting thorough robustness testing, ensuring your REI strategy remains resilient across various market environments Discover how to test robustness effectively.

Conclusion: Should You Add REI to Your Trading Toolkit?

REI clearly demonstrates valuable differences from RSI, offering unique signals, excellent diversification, and robust profitability. It deserves a prominent place in your strategy toolkit.

Ready to elevate your trading strategies?
Want the EasyLanguage code to test REI yourself? Reply to this email, and I’ll gladly send it to you.

FAQs About the Range Expansion Index

1. Best lookback period for REI? Generally between 2–8 bars, optimized per market.

2. Can be used for intraday trading? Yes, like all oscillators, but you need higher timeframe direction.

3. Suitable for beginners? Absolutely, especially on the right market.

4. Can REI fully replace RSI? Yes, like other oscillators they have a similar behavior, but better used together for diversification rather than outright replacement.