Extreme Duration — Identifying Momentum Reversals in Python
Creating & Coding the Extreme Duration to Trade the Markets
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In Technical Analysis, we spend time analyzing when markets are oversold and overbought but we never look at how long do they stay oversold and overbought. What if the duration of time spent oversold/overbought can help us know when on average, the market will finally react? Most of the time, we are happy to see that we are on extremes with regards to a technical indicator, only to realize that the extreme condition could last ages without the market reacting. This is the beauty of randomness and the enormous amount of buyers/sellers for different reasons. In this article, we will create the function that lets us calculate the time spent around the extremes and analyze the signals generated by entering upon a specific timing.
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The Relative Strength Index
The RSI is without a doubt the most famous momentum indicator out there, and this is to be expected as it has many strengths especially in ranging markets. It is also bounded between 0 and 100 which makes it easier to interpret. Also, the fact that it is famous, contributes to its potential.
This is because the more traders and portfolio managers look at the RSI, the more people will react based on its signals and this in turn can push market prices. Of course, we cannot prove this idea, but it is intuitive as one of the basis of Technical Analysis is that it is self-fulfilling.
