With regards to technical analysis, are there ways of determining the confidence level of a directional signal? Taking a relative strength index (RSI) as an example, can the extent to which an asset is oversold or overbought be used to get the percentage likelihood of a movement in either direction?

  • $\begingroup$ While my question may not be well informed and I'm happy acknowledge that it may be a poor one, particularly given my huge lack of expertise in this field, I feel that a down-vote without any explanation is rather bad form. $\endgroup$ – youjustreadthis May 4 '16 at 17:46
  • $\begingroup$ I agree that the down-voter should have the courage to explain why he down-voted the question. $\endgroup$ – Hans May 4 '16 at 19:16
  • $\begingroup$ What is RSI? I think you are referring to relative strength index. It does not help you get answers using acronyms you assume other would understand. $\endgroup$ – Hans May 4 '16 at 19:17
  • $\begingroup$ Thanks @Hans, you're quite right and I've edited accordingly. $\endgroup$ – youjustreadthis May 4 '16 at 19:19

You need a model which assumes that some intrinsic properties such as true overpricing is taking place but masked by the noise which has some probabilistic distribution around the true signal. The averaging of the observed data then takes advantage of the large number theorem or some version of the central limit theorem to flush out the signal. So you need to build a model first.


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