R ELATIVE STRENGTH INDEX RSI

APRIL 9, 2010 BY PHILIP 4 COMMENTS

RSI OR RELATIVE STRENGTH INDEX IS AN INDICATOR THAT MEASURES OVERBOUGHT
AND OVERSOLD LEVELS . READINGS BELOW 25-30 CAN BE SEEN AS OVERSOLD AND
READINGS ABOVE 70-75 CAN BE SEEN AS OVERBOUGHT.
APPLY RELATIVE STRENGTH INDEX (RSI) TO Y OUR TRADING C HARTS
RSI WAS INVENTED BY J. WELLES WILDER AND FIRST INTRODUCED TO THE PUBLIC IN
1978. T HIS INDICATOR IS ONE OF THE MORE POPULAR ONES IN TRADING DESPITE
BEING RELATIVELY NEW. RSI MEASURES MOMENTUM BY COMPARING THE EXTENT OF
THE STOCK S RECENT GAINS AND LOSSES BY TRANSFORMING THIS INFO INTO A
NUMBER BETWEEN 0-100. M ANY TRADERS CONFUSE THIS INDICATOR WITH RELATIVE
STRENGTH BETWEEN TWO STOCKS . RSI HAS NOTHING TO DO WITH THAT THOUGH THE
NAME IMPLIES IT.
MOST USED SETTINGS
RSI IS FORMED BY USING THE AVERAGE GAIN/LOSS OVER A PREDETERMINED PERIOD
WHICH J. W ELLES W ILDER RECOMMENDED A PERIOD OF 14. THIS IS PROBABLY THE
MOST USED SETTING AND SINCE THE INVENTION OF RSI WE HAVE BEEN INTRODUCED
TO INTRADAY TRADING SO WE ARE SEEING MANY DIFFERENT SETTINGS . S CALPERS
MIGHT USE A LOWER SETTING OF 7 PERIODS BUT YOU HAVE TO FIGURE OUT WHAT
YOUR TRADING STYLE IS AND THEN BACK TEST THE SETTING TO SEE WHAT IS BEST .
RSI IS PLOTTED AS A NUMBER BETWEEN 0-100 WITH OVERBOUGHT AND OVERSOLD
LEVELS AT 70 AND 30. W ILDER RECOMMEND THESE LEVELS BUT I HAVE SEEN MANY
TRADERS PREFERRING 80-20. T HIS WILL RESULT IN FEWER BUT HIGHER ODDS
TRADES .
PROBABLY THE MOST USED TECHNIQUE WHEN USING RELATIVE STRENGTH INDEX IS A
CROSSOVER OF 50, EITHER TO THE UPSIDE OR DOWNSIDE . W HEN ABOVE 50, THE
STOCK HAS A BIGGER AVERAGE GAIN THEN AVERAGE LOSSES BUT THE OPPOSITE IS
TRUE WHEN RSI IS UNDER 50.
ANOTHER GREAT USE OF THIS TECHNIQUE IS THE OVERBOUGHT /OVERSOLD LEVELS.
MANY TRADERS WILL BE LOOKING TO ENTER THE TRADE AT THESE LEVELS IF IT S WITH
THE TREND . IT IS IMPORTANT TO TAKE NOTICE OF THE TREND AS RSI CAN STAY EITHER
OVERBOUGHT OR OVERSOLD FOR AN EXTENDED PERIOD OF TIME .
MANY TRADERS ALSO USE THE OVERBOUGHT AND OVERSOLD LEVELS FOR EITHER
TIGHTENING THEIR STOPS OR TAKING PROFIT.
TIPS AND IDEAS
NOW WE HAVE AN IDEA OF WHAT THE RSI IS TELLING US AND HOW TO USE RSI TO
INCREASE OUR ODDS FOR SUCCESS TRADING THE STOCK MARKET . S OME WAYS TO USE
IT ARE :
1. C OMBINING BOTH THE OVERBOUGHT OR OVERSOLD LEVEL WITH A CROSSOVER OF
50 INCREASES THE ODDS OF SUCCESS. B Y ONLY TAKING CROSSOVER AFTER HITTING
THE EXTREME LEVELS WILL ENSURE THAT YOUR STOCK HAS ENOUGH MOMENTUM TO
GIVE YOU A DECENT RISK TO REWARD .
2. DIVERGENCE IS ANOTHER GREAT WAY TO INCREASE YOUR ODDS FOR SUCCESS. BY
COMBINING THE ABOVE MENTIONED ENTRY WITH DIVERGENCE YOU ARE INCREASING
YOUR ODDS FOR A FAST PROFIT. I F PRICE MAKES A NEW LOW BUT RSI MAKES A
HIGHER LOW IT TELLS US THAT MOMENTUM TO THE DOWNSIDE IS DRYING UP AND A
SIGNIFICANT BOUNCE CAN OCCUR ANY TIME NOW. W AIT FOR CONFIRMATION OF THE
50 CROSSOVER AND YOU HAVE YOURSELF A HIGH ODDS TRADE.

R ELATIVE STRENGTH INDEX RSI C HART

OUR IMPLEMENTATION
RSI IS A GREAT MOMENTUM INDICATOR BUT IT HAS ITS WEAKNESSES AS IT DOES NOT
TELL YOU IF YOU ARE GOING AGAINST THE LONGER TERM TREND. I THEREFORE ALWAYS
ADD A MOVING AVERAGE TO DETERMINE THE TREND AND THEN TAKE THE RSI SIGNALS
IN ALIGNMENT WITH THE MOVING AVERAGE .
HERE IS ANOTHER OVERBOUGHT OVERSOLD SIGNAL TECHNICAL INDICATOR
(OSCILLATOR ) COMING UP FOR YOU IN OUR NEXT STOCK MARKET EDUCATION
TECHNICAL ANALYSIS SECTION S TOCHASTIC