【Bi-Monthly Development Story Episode 5】How to measure excess — How to use RSI
Last time, I talked about the origin of the two moons that independently hold long and short positions. This time, the question is how Twilight Moon itself determines “overbought” and “oversold.” I won’t go into difficult formulas; I’ll just share the approach.
What Twilight Moon uses is RSI, a long-known technical indicator. It expresses, on a scale from 0 to 100, which momentum—upward or downward—was stronger in recent price movement. Higher numbers indicate overbought, lower numbers indicate oversold.
This indicator itself isn’t unusual and is widely used in discretionary trading. Twilight Moon’s innovation lies in how to use this number.
RSI can be computed using a configurable number of candlesticks. Looking at a longer period yields looser judgments of overshoot within a big trend. Twilight Moon, conversely, computes with a fairly short period.
Shorter periods make it more sensitive to recent price moves. Small overshoots can be caught early, but it also becomes more prone to temporary noise (small moves that soon settle). This is a trade-off and a core aspect of Twilight Moon’s design for counter-trend on a short time frame.
Where RSI’s value is considered “overbought/oversold” is a key design element. While exact numbers aren’t disclosed, the idea is that the response happens only when RSI moves to quite extreme levels.
If the boundary is lenient, responses increase but so do false signals. If too strict, genuine signals may be missed. This balance is tested against past price movements.
※Illustrative diagram. The exact boundary values and zone widths are not disclosed.
Just because RSI indicates overbought doesn’t instantly decide entry. As planned for next time, the take-profit, stop-loss, and trailing stop values after entry are determined by another approach (automatic adjustment based on volatility). RSI measures “when to enter,” while another mechanism decides “how much price movement to expect.”
- Uses the widely-used RSI indicator to judge overshoot
- Calculation period is made intentionally short to respond to small overshoots (trade-off with noise)
- Boundary for reaction is decided through validation that weighs false signals against opportunity loss (specific values not disclosed)
- RSI handles “timing to enter”; “how much price move to fight with” is handled by another mechanism
Next time, “Distance is all determined by ATR — Automatically adapt to volatility.” We’ll discuss how the take-profit, stop-loss, and trailing stop values are automatically set according to market conditions. I’d be glad if you stay with me until the end.
※This article is provided for informational purposes and is not investment solicitation. The displayed results are past performance and do not guarantee future profits. FX/CFD trading involves risk. Please make your own investment decisions responsibly.