The Big Extender represents the first strategy that combines more than two indicators. Accordingly, the strategy will produce fewer signals, most likely. Here are all the details you have to know about the Big Extender.
Used Indicators #
Exponential Moving Average (EMA)
Picture this: you’re looking at a market chart with a line cutting across the price data. This line, my friends, is the Exponential Moving Average (EMA). The EMA is a kind of moving average that places more emphasis on recent data. We use the 200-period EMA as our long-term trend indicator. When the price sits above this line, it suggests we are in a bull market, and when it’s below, we might be in a bear market.
Relative Strength Index (RSI)
The RSI is akin to a speedometer for a market’s price movement. It shows whether the market is moving too fast and might need to slow down. The RSI is typically used to identify overbought or oversold conditions. An RSI reading over 70 indicates overbought conditions (the market might be moving too fast and could slow down), while an RSI reading under 30 suggests oversold conditions (the market might be moving too slow and could speed up).
EMA applied to RSI
Imagine smoothing the speedometer readings to get a clearer picture of the average speed. That’s what we do when we apply the EMA to the RSI. This line helps us filter out the noise and reduce false signals from the RSI.
Average Directional Index (ADX)
The ADX is like the strength meter of a market trend. It doesn’t care about the direction; it’s just concerned with how strong the trend is. When the ADX is above 30, it suggests the market trend is strong and worth paying attention to.
Signal Identification #
For a Long Signal to fire, we need the following conditions:
- The price is above the 200-period EMA. Picture the market as a ship in the sea – we want to go with the current, not against it. So we want the overall trend to be up.
- The RSI crosses above the 70 line from below. This is like seeing a car speeding up – we want to join the ride while the momentum is strong.
- The RSI is above the EMA applied to the RSI. This means the car’s current speed (RSI) is faster than its average speed (EMA of RSI), indicating acceleration.
- The ADX is greater than 30, meaning the trend strength is strong. This is like seeing a strong current in the sea, indicating a good time for the ship to set sail.
Conversely, for a Short Signal, we have mirror-like conditions:
- The price is below the 200-period EMA, indicating a downtrend – the sea current is moving downwards, and it’s easier to sail in that direction.
- The RSI crosses below the 30 line from above, suggesting a loss of momentum akin to a car starting to slow down.
- The RSI is below the EMA applied to the RSI, indicating a deceleration.
- The ADX is greater than 30, indicating a strong downward trend – the sea current is strong, and we want to ride with it.