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Tuesday, August 31, 2010

Learning Corner : RSI

What is RSI - Relative Strength Index

Developed by J. Welles Wilder and introduced in his 1978 book, New Concepts in Technical Trading Systems, the Relative Strength Index (RSI) is an extremely useful and popular momentum oscillator. The RSI compares the magnitude of a stock's recent gains to the magnitude of its recent losses and turns that information into a number that ranges from 0 to 100. It takes a single parameter, the number of time periods to use in the calculation. In his book, Wilder recommends using 14 periods.

Overbought/Oversold

Wilder recommended using 70 and 30 and overbought and oversold levels respectively. Generally, if the RSI rises above 30 it is considered bullish for the underlying stock. Conversely, if the RSI falls below 70, it is a bearish signal. Some traders identify the long-term trend and then use extreme readings for entry points. If the long-term trend is bullish, then oversold readings could mark potential entry points.

Divergences

Buy and sell signals can also be generated by looking for positive and negative divergences between the RSI and the underlying stock. For example, consider a falling stock whose RSI rises from a low point of (for example) 15 back up to say, 55. Because of how the RSI is constructed, the underlying stock will often reverse its direction soon after such a divergence. As in that example, divergences that occur after an overbought or oversold reading usually provide more reliable signals.


Centerline Crossover

The centerline for RSI is 50. Readings above and below can give the indicator a bullish or bearish tilt. On the whole, a reading above 50 indicates that average gains are higher than average losses and a reading below 50 indicates that losses are winning the battle. Some traders look for a move above 50 to confirm bullish signals or a move below 50 to confirm bearish signals.

Wai : There are many technical books written about it. Need NOT to be too technical. I could use a day to show you what I know about RSI and also question on what I do not know or still 'investigating'.

I was showing RSI to my cousin-bro(a loooong term FA investor, as he claimed) last Sat in less than an hour. Well, as he Maths is quite good too(I was teaching him when he was taking STPM, so I know his level) and should be able to comprehend better when we speak about probability and such. I do use RSI-9, RSI-14 and RSI-26 together with stochastic to check if the particular stock overbought or oversold.

RSI in YouTube




More resource : http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:relative_strength_in


Revision :RSI trading system

BUY when RSI > 50 - bullish signal
SELL when RSI < 50 - bearish signal

1 comment:

Day Trading Courses said...

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