Defining the First Derivative

Dont let the term first derivative scare you into thinking that complicated mathematics is involved. In fact, it is not. The first derivative of any variable is defined as

In other works, as this relates to the futures markets, consider the following: If I calculate the RSI in a given market, and if I then use the RSI as the raw value for calculating a Moving Average of the RSO, then the second calculation, namely the Moving Average of the Moving Average of RSI, then I have calculated a third derivative of the RSI. Figure 8-2 shows an RSI plotted against first derivative.

My work with timing indicators as well as derivatives of timing indicators has convinced me that such manipulation of the data can be very effective in terms of generating meaningful and less random timing signals. Although there is insufficient space here to launch into a discussion of indicator derivatives and their comparisons, I would urge you to undertake such studies on your own. You may be impressed, as I have been, with the results.

A first, second, third, and fourth derivative, and so on, then, are quantities derived from previous indicators which are themselves derivative of other indicators or raw prices.

Let me give you a corrected example of what I mean by a first derivative of the RSI. Figure8-3 shows an intraday market with a 14-day RSI indicator plotted against price. Figure 8-4 now shows the same indicator plotted against price, however, also included is the first derivative of RSI. As you can see, the derivative line is smoother, less choppy, and therefore, in my opinion, more readily usable by futures traders. Figures 8-5 and 8-6

Show two different derivatives of RSI plotted against the same price chart. Examine these if you will, and reach your own conclusion, strictly based on visual observation, as to which of the three might have potential as a timing indicator.

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