Kairi Relative Index is an old Japanese indicator with an unknown founder, an unknown date of inception and waning popularity in the modern day, due to more popular indicators such as Welles Wilder's Relative Strength Index. Today's new generation of traders, since the late '70s, have grown accustomed to newer, more modern indicators.

Because Kairi has an unknown derivation and is used much less even in certain Japanese indicator loyalty zones of Russia and Asia, its continued use is quite questionable. Add the fact that literally no prior writings can be found in the modern day regarding Kairi. The word itself translates to separate or dissociation. We don't want deviation in our indicators or price separation; we want perfect market timing indicators that follow market trends and turns. The difference between the two indicators is slight, and yet varied. The only way to understand Kairi Relative Index is to compare it with the Relative Strength Index.

To begin, both are considered oscillators. Oscillator indicators move with a chart line up or down as markets fluctuate. Calculations vary among each oscillator, so each oscillator serves a different market function. RSI and Kairi serve as momentum oscillators and considered leading indicators. Momentum oscillators measure market prices rate of change. As prices rise, momentum increases and a decrease measures a decrease in momentum. Momentum is reflected both in the manner that RSI and Kairi operate and in its calculations. (For more, read Technical Analysis: Indicators And Oscillators.)

How Kairi Calculates
Kairi calculates deviation of the current price from its simple moving average as a percent of the moving average. If the percent is high and positive, sell. If the percent is large and negative, buy. To calculate a simple moving average, take X closing prices over Y periods and divide by the periods. Kairi's formula is: Price - SMA over X periods divided by SMA over X periods and multiplied by 100. Based on assumptions, 10- and 20-day moving averages should be employed to determine price divergences or separations. These are early hints towards entries and exits. So Kairi's formula indicates a constant moving market, a known method for all Japanese indicators.

How RSI Calculates
RSI calculates based on up and down closes. 100 - 100/(1+ RS). RS = average gain divided by average losses. This is what allows RSI to be classified as an oscillator. Next, average gain = (previous average gain) X 13 + current gain / 14. First average gain - total of gains during past 14 periods/14. Average loss = (previous average loss) X 13 - current loss/14. RSI is a comparison of up and down closes or gains compared to losses. This formula asks the question, "Where has the market been and will the future hold the same promise?" while Kairi is more of a moving target indicator, so entries and exits are easier to hit. (For more, see Buy High And Sell Low With Relative Strength.)

Both Kairi and RSI are set at standard 14 periods. For faster market responses, set periods lower - higher periods will indicate a slower (but sometimes a more accurate) market. Yet the recommended 14 periods for RSI works as intended for Kairi's 14 periods, as well. To understand higher periods of RSI, simply insert a higher number in the above formula. However, it's Kairi that sometimes diverges from its RSI counterpart, which stems from the intended effects based on their divergent formulas. What is important in this phenomenon is the center line of both indicators.

The Center Line
Both indicators are also known as center line oscillators. This is the all important line in the middle that determines entry and exits, longs or shorts, trends and ranges. When lines are at the bottom, normally this indicates an oversold market so it's a matter of time before the market bounces. The recommended methodology for RSI is "go long below 30, and short at 70."

For the most part, this works because RSI is an accurate indicator. Yet a drawback to RSI is that markets can remain in oversold and overbought territory for extended periods. This doesn't represent a losing position. If the market doesn't bounce immediately, eventually it will; the timing of a buy trade was just too early. However, Kairi is more of an early warning indicator to market turns, yet prices can diverge from the indication. The center line simply represents entries and exits for both indicators - 50 for RSI and 0 for Kairi. When the line crosses above the center, go long. Below, go short. From the center line to the top represents approximately 500 currency pips, while top to bottom entries and exits represent 1,000 pips using Kairi and 1,200 pips using RSI.

So if you are long when the line hovers at the bottom, be careful when prices and the line hit resistance at the center. The same goes for a short when prices and the line are above the center line. Markets have a tendency to bounce before prices hit the center line in trending markets for both indicators. Shorts may not hit the center line, but instead turn down, while longs will hit the center line and bounce. Both indicators can be used in any market on any time frame, but because of divergent tendencies, monitoring may be required. (To learn more, see Trading Psychology And Technical Indicators.)

As a forecaster of trends, both indicators work well, although some price divergences may occur along the way. This fact of life assumes traders will not rely on one indicator. It's never recommended to use two of the same type indicators - try a trend indicator rather than an oscillator. As range trades, both are not the best. Gains will be quick and short term until a trend develops, yet RSI will forecast and earn more points than Kairi in trends.

Price divergence occurs in two ways for both indicators, trends and center line positions. Both indicators may break the center line on the way down forcing short trades yet markets can easily turn back up and cross the center line, leading to losses due to these false breaks. But what happens when RSI and Kairi approach the higher levels and far from the center line, and how do you know where prices will go? You don't, unless another indicator is used in conjunction. Both can stay in overbought or oversold levels for long periods in trends. So, entries and exits are best at the center line with monitoring.

Conclusion
Charting packages use two types of Kairi indicators. One type, Kairi looks and acts like RSI. With another chart, Kairi looks like a stock volume indicator or a bar chart. It's recommended to follow the bars up or down. When bars reach the top, sell, and buy when they are at the bottom. Here is the greatest opportunity for price divergence regarding Kairi that can lead to false breaks. In this instance, follow candles or use another indicator along with Kairi. In the end, both indicators are accurate, but both have divergences. (To learn more, see our Technical Analysis Tutorial.)

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