The Composite Index is a custom formula that forms bullish or bearish divergence with the RSI to identify RSI signal failures before they occur. The Composite Index becomes an inseparable companion to the RSI as has been demonstrated throughout the book. In this chapter it is combined with Japanese Candlesticks to show how Eastern charting techniques might apply this formula. Using Volume as a signal confirmation is examined. This chapter discusses the strengths and weaknesses of common indicators in order to isolate desired characteristics for developing a custom formula.
Personal biases contribute to the effectiveness of an indicator's signal.
Depth perception is discussed to clarify how we evaluate charts graphically in a two-dimensional environment. Depth perception needs to be understood as it will affect our judgment of chart signals and will dictate how indicators should be plotted to accommodate personal strengths and weaknesses. An original formula to resolve trading problems associated with time-consuming complex market corrections or reentry problems when markets are in strong trends. The testing of a new indicator and considerations that should be made prior to using a new formula in real-time markets are described. This particular formula displays an unusual characteristic of forming equal and opposite peaks and troughs that minimize traditional signal lag.