The Kairi Relative Index is a powerful technical analysis tool that traders leverage to signal optimal buying and selling opportunities for an asset. By gauging the deviation between the asset’s price and its Simple Moving Average (SMA) over specified periods, typically spanning 10 to 20 days, traders can identify potential entry and exit points.
When an asset’s price is significantly above its SMA for a selected period, the Kairi Relative Index suggests it may be an ideal time to sell. Conversely, if the price is notably below the SMA, it signals potential buying opportunities.
Key Insights
- The Kairi Relative Index highlights the distance between closing prices and a Simple Moving Average (SMA).
- Extreme readings in the KRI are utilized as buy and sell signals.
- The extremities of KRI readings vary by asset, reflecting higher volatility in some assets over others.
- Since the KRI isn’t a pinpoint timing tool, it should be used alongside other analytical methods to generate reliable trade signals.
The Formula for the Kairi Relative Index (KRI)
Kairi Relative Index (KRI) = \igg\[ \ rac {\ ext{Close} - \SMA_n}{\SMA_n} \\igg\] * 100
where:
- SMA = Simple moving average
- n = Number of periods averaged in SMA
How to Calculate the Kairi Relative Index
- Compute a simple moving average (SMA) using the most recent closing prices for a defined number of periods, such as 10.
- Subtract the n-period SMA from the most recent closing price.
- Divide the result by the SMA.
- Multiply by 100.
- Repeat this process with each new closing period.
What the Kairi Relative Index Indicates
Developed by a Japanese investor and widely used in the mid-20th century, the Kairi Relative Index (KRI) assesses how far an asset’s price deviates from its moving average. Notably, assets with higher volatility will exhibit larger KRI values compared to stable assets. For example, SPDR S&P 500 ETF (SPY) shows extreme low readings between -7 and -15 and high readings between 4 and 10.
For highly volatile stocks, extremes can range from -40 to +50. Tracking these historical extremes can offer valuable targets for future analysis. When the KRI registers exceedingly low for an asset, it may be oversold and poised to rebound—but wait for upward confirmation before buying. Similarly, high KRI readings suggest overbought conditions; consider confirming a downward trend before selling.
How to Apply the KRI - An Improved Example
On the illustrated chart, the KRI is superimposed over many years of Apple Inc. (AAPL) stock activity. Notably extreme upwards readings, typically around 15+, are marked, as are lows below -10, using green and red lines for buy and sell signals respectively.
Despite these indications, many signals led to suboptimal entry and exit points if relying solely on KRI. Apple’s macro uptrend during the period mitigated potential missteps. Confirm price reversals alongside reaching KRI extremes before taking action.
Differentiating KRI From MACD
While KRI measures the deviation of closing prices from the SMA, the Moving Average Convergence Divergence (MACD) evaluates the distance between two Exponential Moving Averages (EMAs) and uses a signal line to prescribe trade actions.
Limitations and Considerations for Using the KRI
KRI’s relevance is dependent on the degree to which an asset deviates from its moving average. High extreme readings align with robust market trends, indicating that premature trades could be counterproductive. Complement the KRI with other indicators or price action analysis to pound the table on due diligence.
Bear in mind, a moving average is inherently backward-looking and may not accurately predict future price movements. Thus, the Kairi Relative Index should form part of, but not the entirety of, your trading strategy.
Related Terms: Simple Moving Average (SMA), Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), Crossover, Technical Analysis.
References
- Corporate Finance Institute. “Kairi Relative Index (KRI)”.
