GARCH-RSX Momentum Cluster Strategy

Family: hybrid · Regime: trending · Complexity: high · Asset classes: FX, Equities, Crypto · Timeframes: H1, H4

Thesis

Market trends are not linear but occur in 'momentum clusters' where volatility and directionality are positively correlated. By using RSX (cascaded smoothing) to identify structural shifts and the Momentum Oscillator for price velocity, we isolate high-probability trend segments. The TDI trigger captures tactical entry points during these segments. Crucially, by using Conditional Volatility (GARCH) for risk, the strategy scales down during periods of unpredictable 'volatility shocks' and scales up during stable trending regimes, potentially improving the Sortino ratio compared to fixed-stop strategies.

Components

• RSX (Relative Strength Quality Index) (regime) — Used as the primary regime filter; its cascaded smoothing reduces noise compared to standard RSI, ensuring entries occur only during established structural momentum (>50).
• Momentum Oscillator (direction) — Provides a secondary 'velocity' check; confirms that the current price is moving faster than the historical baseline (Value > 100).
• Traders Dynamic Index (TDI) (entry) — Acts as the tactical trigger. The crossover of the RSI_Price_Line and Trade_Signal_Line within the volatility bands captures high-probability momentum bursts.
• SuperTrend (exit) — Serves as a trailing stop and trend-invalidation exit, utilizing ATR to account for market expansion/contraction.
• Conditional Volatility (CV) (risk) — Determines position sizing and initial stop-loss distance based on GARCH(1,1) estimates of annualized risk.
• Heatmap Framework (confirmation) — Ensures multi-timeframe alignment; the strategy only fires if the higher timeframe (H1) heatmap confirms the lower timeframe signal direction.

Known failure conditions

• RSX remains stuck between 45 and 55 for extended periods, indicating a total lack of trend direction.
• Conditional Volatility (CV) remains at historical extremes (top 5 percentile), leading to position sizes too small to cover transaction costs.
• SuperTrend repeatedly flips within 3 bars of TDI entry, indicating high-frequency noise/whipsaw.

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