RSI

RSI indicator oscillates between 0 and 100 and based on the latest
indicator reading, the expectations on the markets are set. RSI is the most
popular leading indicator, which gives out the strongest signals during the
periods of sideways and non-trending ranges. The formula to calculate the
RSI is as follows:

The objective of using RSI is to help the trader identify oversold and
overbought price areas. Overbought implies that the stock’s positive
momentum is so high that it may not be sustainable for long, and hence
there could be a correction. Likewise, an oversold position indicates that
the negative momentum is high, leading to a possible reversal.
When the RSI reading is between 30 and 0, the security is supposed
to be oversold and ready for an upward correction. When the security
reading is between 70 and 100, the security is supposed to be heavily
bought and is ready for a downward correction.
KEY POINTS
a) If the RSI is fixed in an overbought region for a prolonged period, look
for buying opportunities instead of shorting. The RSI stays in the
overbought region for a prolonged period because of an excess
positive momentum.
b) If the RSI is fixed in an oversold region for a prolonged period, look
for selling opportunities rather than buying. RSI stays in the oversold
region for a prolonged period because of an excess negative
momentum
c) If the RSI value starts moving away from the oversold value after a
prolonged period, look for buying opportunities. For example, the RSI
moves above 30 after a long time may mean that the stock may have
bottomed out, hence a case of going long.
d) If the RSI value starts moving away from the overbought value after a
prolonged period, look for selling opportunities. For example, RSI
moving below 70 after a long time. This means the stock may have
topped out, hence a case for shorting.
 MACD(Moving Average Convergence Divergence)
A standard MACD is calculated using a 12 day EMA and a 26 day EMA. We subtract
the 26 EMA from the 12 day EMA, to estimate the convergence and divergence (CD)
value. A simple line graph of this is often referred to as the ‘MACD Line’. Given the
MACD value, let’s try and find the answer for a few obvious questions:

1. What does a negative MACD value indicate?

2. What does a positive MACD value indicate?
3. What does the magnitude of the MACD value actually mean? As in, what information
does a -90 MACD  convey versus a – 30 MACD?
The sign associated with the MACD just indicates the direction of the stock’s
move. For example, if the 12 Day EMA is 6380, and 26 Day EMA is 6220, the MACD
value is +160. The shorter-term average will generally be higher than the long term only
when the stock price trends upward. A positive sign tells us that there is positive
momentum in the stock, and the stock is drifting upwards. The higher the momentum,
the higher is the magnitude. However, while dealing with the magnitude, always
remember the price of the stock influences the magnitude. When the MACD is negative,
it means the 12 day EMA is lower than the 26 day EMA. Therefore the momentum is
negative. Higher the magnitude of the MACD, the more strength in the downward trend.

The difference between the two moving averages is called the MACD spread. The
spread decreases when the momentum mellows down and increases when the
momentum increases. To visualize convergence and the divergence traders usually plot
the MACD value chart, often referred to as the MACD line.

MACD line oscillates over a central zero line. This is also called the ‘Centerline’. 

1. When the MACD Line crosses the centerline from the negative territory to positive
territory, it means there is a divergence between the two averages. This is a sign of
increasing bullish momentum; therefore, one should look at buying opportunities.
2. When the MACD line crosses the centerline from positive territory to the negative
territory, it means there is a convergence between the two averages. This is a sign of
increasing bearish momentum; therefore, one should look at selling opportunities.

3. Traders generally argue that while waiting for the MACD line to crossover the
centerline, a bulk of the movie would already be done and perhaps it would be
late to enter a trade.  To overcome this, there is an improvisation over this basic
MACD line. The improvisation comes in the form of an additional MACD component
which is the 9-day signal line. A 9-day signal line is an exponential moving average
(EMA) of the MACD line. If you think about this, we now have two lines:

1. A MACD line
2. A 9 day EMA of the MACD line also called the signal line.
 A trader can follow a simple 2 line crossover strategy with these two lines as
discussed in the moving averages chapter and no longer wait for the centerline
cross over.

1. The sentiment is bullish when the  MACD line crosses the 9 day EMA wherein MACD
line is greater than the 9 days EMA. When this happens, the trader should look at
buying opportunities.
2. The sentiment is bearish when the MACD line crosses below the 9 day EMA wherein
the MACD line is lesser than the 9 day EMA. When this happens, the trader should look
at selling opportunities.

The Bollinger Bands

BB is used to determine overbought and oversold levels, where a trader will try to sell when the
price reaches the top of the band and will execute a buy when the price reaches the bottom of
the band.

1. The middle line which is The 20 day simple moving average of the closing prices
2. An upper band – this is the +2 standard deviation of the middle line
3. A lower band – this is the -2 standard deviation of the middle line
The standard deviation (SD) is a statistical concept; which measures a particular
variable’s variance from its average. In finance, the standard deviation of the stock price
represents the volatility of a stock.

Upper Line is overbought line. So if price reaches it should be shorted. If price reaches
lower line… it is over sold should be bought

FIBONACCI RETRACEMENT
Fibonacci ratios, i.e. 61.8%, 38.2%, and 23.6%, help the trader identify the retracement’s possible
extent. After a stronguptrend, Stock may retrace by 61,38,23 % of rally gains and then reshoot.

Eg Stock value 100. Shoot up to 140 so may retrace by24.7(115.3)-61.8%, or retrace by approx Rs
16 making 124.72 or retrace by 23.6% to 130.56 nto again rise.