The Kairi Relative Index

BACKGROUND
The kairi is Japanese and that is about all we know about it. We have no idea who created it, nor do we know how old it is. But we do know how it works. The kairi is an oscillator with the sole purpose of calculating price fluctuations. However, it has another feature built into it, a momentum oscillator.

A momentum oscillator measures the strength of the up or down movement of price instead of the actual price level. The harder and faster a tradable's price falls, the bigger the oscillator move. The same goes for an upward move. Once the price move slows down, so does the momentum oscillator.

So the kairi measures the strength of the move of a security. Now we need to dig deeper to figure out how it calculates the strength of a move.

To calculate the kairi, you need the latest price of the security you are following and its simple moving average (SMA). The KRI is calculated using the difference between the latest price and its simple moving average (SMA), which it expresses as a percentage of the moving average. The formula is straightforward:

KRI = Price - SMA over X periods divided by the SMA over X periods and multiplied by 100

The default SMA is 10, but some prefer to use a 20-day moving average for better results. Now that we can calculate it, we need to figure out how it can best be used.

These are extreme situations, and when they are seen, it is best to follow through and sell or buy, depending upon the level. KRI is a center line indicator and the center line is set at zero. You will probably not plot the kairi on a chart yourself; you will most likely use charting software to do it for you. You can choose to either display the kairi overlaid on a chart or in a separate panel.

OUT IN THE WILD
On paper, the kairi looks excellent. However, success on paper is meaningless. How does the indicator do when put to the test? The only way to see if it works is to use it on a chart with real-time data. Obviously, a study of the kairi's effectiveness would be hindered if it were only done during one month. So using charts, a keen eye, and unbiased decision making, we put the kairi through its paces in November 2010 to get an idea of how it performed. We know that the purpose of the kairi is to signal us to buy and sell. So we will look at how effective it is in doing so.

The five-minute chart of the euro/US dollar (EUR/USD) in Figure 1 is for September 9, 2010. Two points are marked on the chart to illustrate the index's effectiveness. The first is shortly after midnight, when the move down bottoms below 0.10 level on the kairi displayed under the chart. The KRI was in an oversold situation. The situation occurs again a few hours later when another short cover or buy was signaled by the kairi. Later that day at around 5 pm, the KRI signaled an overbought situation. At that point, the EUR/USD had run into the +0.200 level, signaling a perfect time to close out your long position or initiate a new short position.

FIGURE 1: FIVE-MINUTE CHART OF THE EUR/USD. The KRI moves below 0.10 level shortly after midnight on September 9, 2010. Later that day, around 5:00 pm the KRI signaled an overbought situation when it hit +0.20. This indicated that you should close out your long positions or initiate a short position.

A day later on September 10, note the kairi on a five-minute chart of the EUR/USD (Figure 2), heading up. From midnight on, the move was basically straight up until around 3:00 am, when the KRI went well past the +0.20 level, signaling an overbought situation.

FIGURE 2: THE FOLLOWING DAY. On September 10, 2010, the KRI went well above the +0.20 level. By 9:00 am the KRI had fallen to the 0.20 level.

The EUR/USD did retrace but went back up at around 5:00 am and tested the high twice. The next line on the chart is at 9:00 am, when the kairi indicates an oversold situation when the index was in the 0.20 level. Usually, there is an immediate move toward the center line, followed by a minor retracement to the downside before the move heads back toward the center line. In this case, that did not happen. What happened was an immediate move back to and above the center line.

Figure 3 shows the five-minute chart of the US dollar/yen (USD/JPY) for September 13. At 2:00 am, there's a strong move to the downside. The KRI dropped until it hit the 0.20 level, indicating that the USD/JPY was deep in oversold territory. In this case, it did not fall any lower, moving back to the center line and eventually above it -- all the way until shortly after 8:00 am, when the move to the upside reached overbought territory. Then the kairi was in the +0.12 level, signaling that a change of direction was likely to occur.

FIGURE 3: FIVE-MINUTE CHART OF THE USD/JPY. On September 13, 2010, you see a very strong move to the downside. The KRI fell rapidly until it hit the 0.20 level. Shortly after 8:00 am, the move to the upside hits overbought territory.

After that, Figure 4 shows a five-minute chart of USD/JPY for September 13. You can see what happens from 8:00 am to 8:57 am (shortly before the end of the candle). In that hour, the USD/JPY moves to the downside aggressively. It goes from an overbought situation into an oversold situation at 0.1280. The momentum of the move is illustrated perfectly by the kairi.

FIGURE 4: A LOT CAN HAPPEN IN AN HOUR. Just before 9:00 am, the USD/JPY moves aggressively to the downside. It moves from an overbought situation into an oversold one at 0.1280.

So the kairi does have its uses. There is a compelling reason why the KRI has been forgotten, and it's called the relative strength indicator (RSI).

RELATIVE STRENGTH INDEX
The RSI was introduced in 1978, and like the KRI, it too is a momentum oscillator that shows the magnitude of a price move with numbers. The numbers represent the current level at which the security is trading. The scale is zero to 100. The 70 and 30 levels are areas that signal overbought and oversold territory, 70 being overbought and 30 oversold. RSI uses a 14-day trading period. The formula for the RSI is:

RSI = 100 - 100/(1 + RS)

RS = Average gain/Average loss

According to Wilder, when a security moves down rapidly in price, it reaches a certain point where the pressure is too much. At this level, the security is being oversold. The same goes for overbought territory. Wilder said seeing either level means a reversal would take place soon.

On a chart, the RSI will appear as a line similar to the KRI. Depending on where the line falls with respect to oversold/overbought levels, you will get an idea of the current state of buying or selling pressure on the security.

Not all charting software packages will have the kairi. The difficulty lies in finding charting software that will allow you to use it.

SUGGESTED READING
Wilder, J. Welles [1978]. New Concepts In Technical Trading Systems, Trend Research.