What Is the Kairi Relative Index (KRI)?
The Kairi Relative Index is a technical analysis metric that traders use to indicate when it is time to buy or sell an asset. It measures the deviation of the price from the simple moving average (SMA) of that asset's price over a period of time, typically 10 to 20 days.
If an asset's price is much higher than the SMA of the asset over a chosen time period, the Kairi Relative Index favors selling. If an asset's price is much lower than the simple moving average, then the index favors buying the asset.
- The Kairi Relative Index measures the distance between closing prices and a Simple Moving Average (SMA).
- Extreme reading in the KRI are considered buy and sell signals.
- Extreme readings will vary by asset, with more volatile assets reaching much higher and lower extremes that more sedate assets.
- The KRI is not an accurate timing signal, and therefore, should be combined with other forms of analysis to generate trade signals.
The Formula for the Kairi Relative Index (KRI)
Kairi Relative Index (KRI)=[SMAnClose−SMAn]×100where:SMA=Simple moving averagen=Number of periods averaged in SMA
How to Calculate the Kairi Relative Index
- Calculate a simple moving average using the most recent closing prices for a specified number of periods, such as 10 (n).
- Deduct the n-period SMA from the most recent close price.
- Divide the result by the SMA.
- Multiply by 100.
- Repeat the process as each period closes.
What Does the Kairi Relative Index Tell You?
The Kairi Relative Index was invented by an investor in Japan. It came into widespread usage in the middle of the 20th century, but by the 1970s it had been superseded by more sophisticated metrics like the Relative Strength Index (RSI).
The KRI is measuring how far away the price is from its moving average. Assets that move a lot will tend to have larger values than assets that don't move a lot. For example, an extremely low reading on the SPDR S&P 500 ETF (SPY) is between -7 and -15 and a high reading is four to 10 on the upside.
A volatile stock may have extreme readings of -40 or +50. Therefore, when the indicator is applied to a stock or other asset, note the extreme levels the indicator has reached in the past on that asset. Those are the areas to watch for on the indicator in the future.
When the indicator falls to an extremely low reading for that asset, the indicator is saying the price is oversold and could bounce. Consider waiting for confirmation, such as the price actually starting to rise before buying.
When the indicator rises to an extremely high reading for that particular asset, the indicator is saying the price is overbought and could decline. Consider waiting for confirmation before selling, such as the price starting to fall.
Example of How to Use the Kairi Relative Index
On the chart below, the KRI is added to a Apple Inc. (AAPL) weekly chart.
Over more than seven years, extreme readings on the upside have typically been 15 or above. Extremely low readings have been below -10.
Some of these extremes are marked by vertical lines on the chart, with green lines representing KRI buy signals and red lines representing KRI sell signals.
While some of these trades would have worked out, mainly because Apple was in an overall uptrend during the period, many signals would have resulted in poor entry and exit points if the KRI was used on its own. Several buy signals occurred when the price of Apple was still declining. Several sell points occurred too early as the price will still moving higher.
Waiting for confirmation of a price reversal once the KRI had reached an extreme would have helped prevent some of these early entries and exits.
Difference Between the KRI and the MACD
The KRI measures the distance of closing prices to the SMA. The Moving Average Convergence Divergence (MACD) measures the distance between two exponential moving averages. A signal line is then typically applied to the MACD to generate trade signals.
Limitations of Using the Kairi Relative Index
The KRI is tracking how far an asset is from its moving average. Extreme readings are considered sell or buy signals, but users must also note that the more extreme the reading the stronger the trend is. Prices need to run fast and hard in order to move away from the moving average. Therefore, trying to short a rapidly rising market or buy a rapidly falling market can be like stepping in front of a freight train.
It is prudent to wait for some other form of verification that the price is actually turning when the Kairi indicator reaches an extreme level. Trades may use other technical indicators or price action to signal the price is turning.
The KRI may turn lower or higher without the asset's price turning lower or higher. This can happen because the distance between the price and the SMA narrows, but the price can still continue in its current direction.
A simple moving average is the main component of the KRI indicator. Averages are historical in nature, and may not provide insight into what will happen in the future.