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.
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)
- 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
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.
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
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.
I would prefer to use the majority of technical indicators such as the Range Expansion Index indicator on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.
The Range Expansion Index indicator is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.
Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.
The methods of implementing the Range Expansion Index indicator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with the Range Expansion Index indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.