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When RSI met the Binomial-Tree

Author

Listed:
  • Rodrigo Alfaro
  • Andrés Sagner

Abstract

In this paper we provide a useful method to forecast one the most popular technical analysis tool: the Relative Strength Index (RSI). This method is based on the assumption that stock price can be characterized by the standard binomial model widely used for pricing option. The algorithm is as simple as to code a standard European option. An empirical application to the exchange rate chilean peso and dollar is provided. The results show that the proposed method is superior to the usual ARMA modeling.

Suggested Citation

  • Rodrigo Alfaro & Andrés Sagner, 2009. "When RSI met the Binomial-Tree," Working Papers Central Bank of Chile 520, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:520
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    File URL: https://www.bcentral.cl/documents/33528/133326/DTBC_520.pdf
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    References listed on IDEAS

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    1. Ana María Abarca G. & Felipe Alarcón G. & Pablo Pincheira B. & Jorge Selaive C., 2007. "Nominal Exchange Rate in Chile: Predictions based on technical analysis," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 10(2), pages 57-80, August.
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    4. Ullah, Aman, 2004. "Finite Sample Econometrics," OUP Catalogue, Oxford University Press, number 9780198774488.
    5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    6. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
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