The Range Expansion Index indicator or REI indicator for short, is a market-timing oscillator. It measures the strength and weakness of a trend based on the price changes. Tom Demark introduced it in his book The New Science of technical analysis. The Range Expansion Index indicator can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy. The Range Expansion Index identifies areas of price exhaustion generally associated with price peaks and troughs. This is a technical indicator, namely, an oscillator, which can be applied on currency, stock and commodity markets.
What is the Range Expansion Index?
The Range Expansion Index uses arithmetic calculations and filters false signals in a mor complex manner than exponentially calculated indicators like MACD.
The indicator oscillates between the values of -100 and +100. The values above +60 are considered as overbought and below -60 as oversold.
Demark mentioned that traders don’t consider a time when finding overbought and oversold zones. He noted that if the indicator is in the overbought or oversold zone for more than 6 bars, this indicates a trend’s strength.
On the chart below, notice there are different bars. The green and blue bars represent a bullish pattern, whereas red and pink bars represent a bearish pattern.
Demark calculated the Range Expansion Index values by adding the differences between the present day’s high and two days earlier high, and the present day’s low and earlier two days’ low. The final equation was:
X = (H – H2) + (L – L2)
Where;
- H is the present high.
- H2 is the high two days earlier.
- L is the present low.
- L2 is the low two days earlier.
On MT4, the default period is 8. Demark suggested using the default period. However, you can increase or decrease the value according to your own forex trading system.
How to use the Range Expansion Index?
The Range Expansion Index generates signals on the bases of +60 and -60 level. If the indicator shows a value of +60 or above, a buy signal occurs. And, if it shows a value of -60 or below it, a sell signal appears.
To filter false trading signals, Demark proposed to use REI with POQ (Price Oscillator Qualifier) indicator. The POQ is another one of Tom Demark’s indicator. Besides this, you can use the indicator with MACD or RSI for price action.
The indicator shows a downtrend when its value rises above 60 and then drops below it. Conversely, the REI displays an uptrend when its value drops below -60 and then rises.
The author didn’t recommend trading in extreme overbought and oversold conditions. The overbought and oversold conditions are indicated by six or more bars above or below +60 and -60 level.
The REI can be used on any timeframe and any trading instrument including forex, stocks, commodities, cryptocurrencies, indices and more.
Range Expansion Index trading strategy
The Range Expansion index can be used in short-term and long-term timeframes as an extra oscillator indicating likely extreme price movements.
This indicator fluctuates within the range from +100 to -100 percent. Its values running over +60 mean overbought market conditions and a possible price reversal in the short time. The indicator values above +60 suggest that purchases dominate. When REI drops below the -60 level, it indicates that the price considerably fell in a given timeframe and a rebound is possible.
You can use the Range Expansion Index in short-term trading strategies and long-term trading strategies. As the REI is a trend indicator, it discovers the short-term overbought and oversold conditions. But we may want to avoid extreme overbought and oversold conditions.
Trading based on the indicator’s signals (extremes in the overbought or oversold zones) should include the filter selecting the signals being formed. One of the simplest and relevant methods of filtering is the use of 50 period Simple MA.
For long-term trading, we can apply the REI with other oscillators like RSI or MACD for extra filters.
Range Expansion Index buy strategy
- The indicator should be above the +60 level.
- Wait for the price bar to go bullish before entry.
- Set a stop-loss near a recent swing low.
- Exit the trade when the bars of the indicator drop below the 0 level.
Range Expansion Index sell strategy
- The indicator should be below the -60 level.
- Wait for the price bar to go bearish before entry.
- Set a stop-loss near a recent swing high.
- Exit the trade when the bars of the indicator rise above the 0 level.
Range Expansion Index Conclusion
The range expansion index (REI) is a technical indicator used in the technical analysis of financial markets. It is intended to chart the relative strength or weakness of a trading vehicle based on the comparison of the recent price changes and the overall price changes for the period.
Just like any other oscillator, the Range Expansion Index is a useful trading tool for determining the direction of the trend. The REI indicator can be used on any timeframe and trading instrument. It can helps to identify the highs and lows of the present time and two days before. Also, when combined with other technical indicators, it can define different price fluctuations in the market.
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