Alton Hill is a Cofounder at TradingSim. He has a passion to help people and found that one of his ways of doing so, is through the world of Day Trading. Alton’s skillset is in Product Development and Design Thinking which he uses to write and improve the overall experience for TradingSim.
Random Walk Index Definition
The random walk index (RWI) is a technical indicator that attempts to determine if a stock’s price movement is random or nature or a result of a statistically significant trend. The random walk index attempts to determine when the market is in a strong uptrend or downtrend by measuring price ranges over N and how it differs from what would be expected by a random walk (randomly going up or down). The greater the range suggests a stronger trend. The RWI states that the shortest distance between two points is a straight line and the further prices stray from a straight line, implies the market is choppy and random in nature.
Random Walk Index Formula
The random walk index determines if a security is in an uptrend or downtrend. For each period the RWI is computed by calculating the maximum of the following values for high periods:
(HI – LO.n) / (ATR.1(n) * SQRT(n))
For each period the RWI is computed by calculating the maximum of the following values for low periods:
(HI.n – LO) / (ATR.1(n) * SQRT(n))
Trading with the Random Walk Index
Michael Poulos the creator of the RWI, discovered during his research that it was best optimized for 2 to 7 periods for short-term trading and 8 to 64 periods for long-term trading. Readings of the long-term RWI of highs that exceed 1 provides a good indication of a sustainable uptrend. Conversely, a long-term RWI of lows above 1 provide a good indication of a sustainable downtrend. Poulous realized that by combining the short-term RWI with the long-term RWI in a trading system, it could provide accurate buy and sell points. Below are some rules developed by Poulos for trading stocks and futures with his RWI:
Enter a long (or close short) when the long-term RWI of the highs is greater than 1 and the short-term RWI of lows peaks above 1
Enter short (or close long) when the long-term RWI of the lows is greater than 1 and the short-term RWI of highs peaks above 1