Trading Online Based On The Relative Strength Index
Investors who want to learn stock market investing often turn to technical analysis for objective and unbiased guidance as to when they should enter or exit a particular position. As discussed in other parts of this Technical Analysis series, some events are simpler to determine than others, especially for people who are just starting to learn stock market investing techniques. The Relative Strength Index (RSI) of a security would be medium-difficult.
Relative Strength Index (RSI) Defined As an oscillator the RSI is a measurement of a security price's relative strength vis-a-vis its historical prices. Why the investor might care about RSI is that it identifies overbought and oversold conditions and will do a better job than the security price itself of identifying support and resistance levels.
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.
Calculating the RSI Mathematically speaking, the RSI requires a touch more work than other technical analysis calculations. To determine a security's RSI, you use the following: 100 - [100/(1 + A)] where A is the average up closes over the period divided by the number of down closes for the same period. If you use a period of 14 days (the norm, it seems) and had 7 up days and 7 down days, then your RSI would be 50 which is in range.
Trading the RSI Unlike other indicators, the RSI does not simply provide black-and-white buy or sell recommendations. Instead the RSI can provided a number of key pieces of information. First the RSI is often better than the underlying security's price chart at demonstrating key support and resistance levels. Second, the RSI will show whether a security is overbought (level between 70 and 100) or oversold (between 0 and 30). These bearish and bullish signals can help investors determine whether to exit an existing position or open a new one, either on the long end or the short end. Relying on the RSI to confirm a prospective trade is really the entire point of using technical analysis in the first place.
Today, trading software makes good use of the RSI and other technical analysis signals to make simple buy and sell recommendations. An absence of this type of advanced software would make manually charting the RSI an extremely time consuming and intellectually draining affair. For investors who want as hand off an experience with the decision making as possible, some software will even give simple buy or sell signals, making the experience more enjoyable for many. - 23310
Relative Strength Index (RSI) Defined As an oscillator the RSI is a measurement of a security price's relative strength vis-a-vis its historical prices. Why the investor might care about RSI is that it identifies overbought and oversold conditions and will do a better job than the security price itself of identifying support and resistance levels.
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.
Calculating the RSI Mathematically speaking, the RSI requires a touch more work than other technical analysis calculations. To determine a security's RSI, you use the following: 100 - [100/(1 + A)] where A is the average up closes over the period divided by the number of down closes for the same period. If you use a period of 14 days (the norm, it seems) and had 7 up days and 7 down days, then your RSI would be 50 which is in range.
Trading the RSI Unlike other indicators, the RSI does not simply provide black-and-white buy or sell recommendations. Instead the RSI can provided a number of key pieces of information. First the RSI is often better than the underlying security's price chart at demonstrating key support and resistance levels. Second, the RSI will show whether a security is overbought (level between 70 and 100) or oversold (between 0 and 30). These bearish and bullish signals can help investors determine whether to exit an existing position or open a new one, either on the long end or the short end. Relying on the RSI to confirm a prospective trade is really the entire point of using technical analysis in the first place.
Today, trading software makes good use of the RSI and other technical analysis signals to make simple buy and sell recommendations. An absence of this type of advanced software would make manually charting the RSI an extremely time consuming and intellectually draining affair. For investors who want as hand off an experience with the decision making as possible, some software will even give simple buy or sell signals, making the experience more enjoyable for many. - 23310
About the Author:
Chris Blanchet has over 16 years as a Financial Advisor. Read more about online trading and receive complimentary access to the Technical Analysis Series at Online Trader Today.
posted by Mr. Forex at
12:50 AM
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