Range Expansion Index (REI) – What It Is & How to Trade with It

Range Expansion Index (REI) – What It Is & How to Trade with It

What is the Range Expansion Index (REI)?

The Range Expansion Index (REI) is a momentum indicator developed by Thomas DeMark to measure price expansion relative to its range over a set period. Unlike other oscillators, REI applies noise-filtering techniques to provide more reliable overbought and oversold signals, making it ideal for traders who want to avoid false signals in volatile markets.

The REI formula is:
REI = [(Upward Price Changes – Downward Price Changes) / (Upward Price Changes + Downward Price Changes)] × 100

Where:

• Upward Price Changes = Positive price movements over the selected period.
• Downward Price Changes = Negative price movements over the selected period.

Key Features of Range Expansion Index

• Identifies overbought (above +60) and oversold (below -60) conditions.
• Reduces false signals compared to RSI and Stochastic.
• Works well for detecting trend reversals and momentum shifts.

How to Use REI in Forex Trading

1. Overbought & Oversold Strategy

REI helps traders identify extreme market conditions for potential reversals:

• Buy Signal: When REI falls below -60 and starts moving up.
• Sell Signal: When REI rises above +60 and starts moving down.

Trading Tip: REI performs best in range-bound markets, where price oscillates between support and resistance levels.

2. Trend Confirmation Strategy

REI can confirm the strength of ongoing trends:

• Bullish Trend: REI remains above zero and consistently holds above +30.
• Bearish Trend: REI stays below zero and consistently remains below -30.

3. REI Divergence Strategy

Divergence between price and REI can signal trend reversals:

• Bullish Divergence: Price makes a lower low, but REI forms a higher low (buy signal).
• Bearish Divergence: Price makes a higher high, but REI forms a lower high (sell signal).

4. REI with Moving Averages

Pairing REI with a moving average (e.g., 50 EMA) helps refine trade signals:

• Buy when: REI crosses above zero, and price is above the 50 EMA.
• Sell when: REI crosses below zero, and price is below the 50 EMA.

Pros and Cons of Using Range Expansion Index

✅ Pros:

• More effective at filtering noise than standard oscillators.
• Provides reliable signals for overbought and oversold conditions.
• Works well in both trending and ranging markets.

❌ Cons:

• Can produce false signals in highly volatile markets.
• Requires additional confirmation from trend indicators.

Final Thoughts

The Range Expansion Index (REI) is a versatile momentum oscillator that helps traders identify trend reversals, filter out market noise, and confirm momentum shifts. When combined with moving averages or support/resistance levels, REI enhances trade accuracy and decision-making.