What if RSI and EMA produce similar results?

2 Feb 2023

█ What if RSI and EMA produce similar results?

In the world of trading, technical indicators play a crucial role in making informed decisions. One such indicator is the Relative Strength Index (RSI), and another is the Exponential Moving Average (EMA). Both of these indicators have been widely used by traders to analyze market trends and make predictions about future price movements. However, it has long been a topic of debate among traders as to which of these two indicators is better.


█ What if RSI and EMA produce similar results?
We wanted to determine the relationship* between the RSI and the EMA, specifically examining the hypothesis that when the RSI crosses above the value of 50, it returns similar results as when the price crosses above a certain length of an EMA. Similarly, when the RSI crosses below the value of 50, it returns similar results as when the price crosses below a certain length of an EMA. Our goal was to determine whether the RSI and EMA were related* in any way.




█ Our Simulations
We designed a series of simulations to compare the accuracy of the RSI and EMA in predicting market trends. The simulations were designed to test the assumption that the RSI and EMA were equal* in terms of accuracy in predicting price movements.

█ Our definition of "predict price movements."
If RSI crosses above the value of 50, there is a higher likelihood of a bullish move. If RSI crosses below the value of 50, there is a higher likelihood of a bearish move.




█ Our assumption for this study
When the RSI crosses above the value 50, it is equal* to when the price crosses above a certain EMA length, and when the RSI crosses below the value 50, it is equal* to when the price crosses below a certain EMA length. This assumption had never been tested until our team decided to put it to the test.


█ Results
To our surprise, we found a strong relationship* between the RSI and the EMA. We discovered that when the RSI crosses above the value of 50, it returns similar* results as when the price crosses above a certain length of an EMA. Conversely, when the RSI crosses below the value of 50, it returns similar* results as when the price crosses below a certain length of an EMA.

The assumption was accurate and that the correlation* between the RSI and EMA was 1, indicating that the results of both indicators were highly consistent. This means that there is an EMA length that performs exactly* the same as the RSI in terms of predicting market trends.


Validity Checks

• We stored crossover values for both RSI and EMA in 2 different arrays, and by running the following tests, we could conclude our findings.
  

Correlation Check

• The correlation between RSI and EMA provides insights into the relationship between the two arrays.
  

Array Size Checks

• The "diff" tells us how different the sizes of the two arrays are. If the size of both arrays is the same, "diff" would be 0, indicating that the two arrays have the same number of elements.
  

Percentage Check

• The percentage difference between RSI and EMA is a measure of the similarity between the two arrays. A percentage difference of 0 indicates that the two arrays are the same size, while a higher percentage difference indicates that the two arrays are different in size.
  

Ratio Check

• The ratio represents the relationship between the two arrays, in terms of the sum of their elements. If the ratio is equal to 1, it means that the sum of the elements in the two arrays is the same. The higher the ratio, the more the elements in RSIa are relative to the elements in EMA. The lower the ratio, the less the elements in RSI are relative to the elements in EMA.
  

█ What is the exact relationship between the two indicators?
After further testing and analysis, we discovered that the length of the EMA that returns results similar* to the RSI is given by the formula: "2* RSI Period - 1". This formula provides traders with a clear, scientific method for determining the length of an EMA that will return results similar* to the RSI.




█ What does it mean for Traders?
The study has provided valuable insights into the accuracy of RSI and EMA. It has shown that both indicators are approximately equal in terms of accuracy and that traders can use either one without having to sacrifice accuracy. This means that traders can choose RSI or EMA, depending on their personal preferences and trading style.


█ Conclusion
Our study has shown that when the RSI crosses above the value of 50, it returns similar* results as when the price crosses above a certain length of an EMA. Similarly, when the RSI crosses below the value of 50, it returns similar* results as when the price crosses below a certain length of an EMA. Furthermore, we have discovered the exact* relationship between the RSI and EMA, given by the formula "2 * RSI Period - 1". These findings provide valuable insights for traders and demonstrate the potential for data-driven approaches in trading.

We showed that the RSI and EMA were highly correlated*, indicating that the results of both indicators were highly consistent*. This knowledge can save traders time and effort, as they can use one indicator to validate the results of the other.


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Disclaimer

*Our results are approximate. We encourage you to test the assumption yourself. We do not guarantee that you will get the same results. This is an educational study for entertainment purposes only. The findings/results may or may not be true.

The information contained in my Scripts/Indicators/Ideas/Algos/Systems does not constitute financial advice or a solicitation to buy or sell any securities of any type. I will not accept liability for any loss or damage, including without limitation any loss of profit, which may arise directly or indirectly from the use of or reliance on such information.

All investments involve risk, and the past performance of a security, industry, sector, market, financial product, trading strategy, backtest, or individual's trading does not guarantee future results or returns. Investors are fully responsible for any investment decisions they make. Such decisions should be based solely on an evaluation of their financial circumstances, investment objectives, risk tolerance, and liquidity needs.

My Scripts/Indicators/Ideas/Algos/Systems are only for educational purposes!

2 Feb 2023

Nota

In this case, if you use RSI 14, you can use EMA 27 instead and get exactly* the same results. 😎 Based on our assumption for this study.