People who are trying to learn stock market investingtechniques will often rely a little too heavily on technical analysis when it comes to determining entry and exit points in their positions. That is why many different tools and events are recommended to confirm or refute a particular event. As mentioned in other areas of this Technical Analysis Series, some parts of technical analysis are easier to compute than others. RSI (relative strength) is considered medium to difficult.
What is the Relative Strength Index (RSI) The RSI is an oscillator that measures a security's "relative strength" against its own price history. This technical indicator allows the investor to determine whether the security is currently overbought or oversold and, in fact, provides a better indication of support and resistance levels than the security's price chart would.
How the RSI Works In terms of getting a signal from oscillators, the RSI is a little different from the others that we have covered in our technical analysis series as it does not provide a clear buy or sell signal. Instead, the RSI works on a scale of 0 to 100. Of interest to the investor are the following: Level 0 to 30 is oversold; 30 to 70 is in range and; 70 to 100 is overbought. How this impacts a trading decision will depend on other implications facing the investor.
Figuring out the RSI In terms of mathematics, maintaining an ongoing RSI chart is more involved than some other technical analysis calculations. To figure out a security's RSI, we use this formula: 100 - [100/(1 + A)] where A consists of the average "up" days divided by the average "down" days over a predetermined time frame. For example, if a stock closes up 7 days and down 7 days of the past 14 days, then the RSI would be 50.
Using RSI to Trade Securities The RSI is more useful than just providing buy or sell signals to investors. First, the RSI will show areas of support and resistance more clearly than security prices would. Second, overbought and oversold conditions can help determine whether one should sell, buy or hold an existing or non-existing position. They are not typically used on their own to trigger a buy or sell as they provided bearish (0 - 30) and bearish (70 - 100) signals. Using tools such as the RSI to determine safe or unsafe points of entry and exit is really the whole purpose of technical analysis in the first place.
Trading software can alleviate a lot of the time consuming and draining calculations needs to produce a solid buy or sell signal. Although technical analysis involves many aspects and signals, such software can change an individual investor's experience from overwhelmed to simple... or at least make it simpler.
What is the Relative Strength Index (RSI) The RSI is an oscillator that measures a security's "relative strength" against its own price history. This technical indicator allows the investor to determine whether the security is currently overbought or oversold and, in fact, provides a better indication of support and resistance levels than the security's price chart would.
How the RSI Works In terms of getting a signal from oscillators, the RSI is a little different from the others that we have covered in our technical analysis series as it does not provide a clear buy or sell signal. Instead, the RSI works on a scale of 0 to 100. Of interest to the investor are the following: Level 0 to 30 is oversold; 30 to 70 is in range and; 70 to 100 is overbought. How this impacts a trading decision will depend on other implications facing the investor.
Figuring out the RSI In terms of mathematics, maintaining an ongoing RSI chart is more involved than some other technical analysis calculations. To figure out a security's RSI, we use this formula: 100 - [100/(1 + A)] where A consists of the average "up" days divided by the average "down" days over a predetermined time frame. For example, if a stock closes up 7 days and down 7 days of the past 14 days, then the RSI would be 50.
Using RSI to Trade Securities The RSI is more useful than just providing buy or sell signals to investors. First, the RSI will show areas of support and resistance more clearly than security prices would. Second, overbought and oversold conditions can help determine whether one should sell, buy or hold an existing or non-existing position. They are not typically used on their own to trigger a buy or sell as they provided bearish (0 - 30) and bearish (70 - 100) signals. Using tools such as the RSI to determine safe or unsafe points of entry and exit is really the whole purpose of technical analysis in the first place.
Trading software can alleviate a lot of the time consuming and draining calculations needs to produce a solid buy or sell signal. Although technical analysis involves many aspects and signals, such software can change an individual investor's experience from overwhelmed to simple... or at least make it simpler.
