Random Walk Index (RWI)
Michael Poulos is an inventor of the Random Walk Index. His purpose was to develop an indicator that would have a better effect than fixed look-back period and any traditional smoothing techniques. The basis of RWI is a theory of the shortest path from one point to another. In case the prices stay too far from the line traced for a period, then the movement efficiency is considered to be minimal. Highly random movement creates considerably fluctuating RWI.
The number of periods, recommended by Poulos for effective RWI applying is from 2 to 7 for the short-term, whether the long-term requires from 8 to 64 periods. It is done to show the short-term fluctuations and long-term trends. RWI peaks in the short term indicate with the price highs, whether its bottoms describe prices decline.
Long-term analysis describes RWI peaks exceeding 1.0 as an indication of a reliable uptrend. Stable downtrends are shown by RWI taking low values over 1.0.
Long-term RWI values of highs is above zero and the long-term RWI of lows exceeds 1.0 as well, the trading system that uses RWI should expect close short (or enter long). Close long (or enter short) takes place when RWI of the lows is over 1.0 along with short-term RWI of highs exceeds 1.0.
RWI is the ratio of actual price trending to a random walk. In case the move exceeds the latter along with the present trend, the index is to exceed 1.0.