RSI is Relative Strength Index. The name itself gives some idea of what RSI is. Strength obviously refers to what is stronger? Buy or Sell.
Disclaimer: Please understand that RSI or Relative Strength Index is just an indicator of the strength of a certain condition which you will read in this post. It is not a guarantee that if SELL strength is strong it means that the stock will fall, and if BUY strength is strong it means that the stock will rise. Please keep this in mind before reading.
RSI is basically a momentum indicator. Momentum indicator is what is happening at the moment in that stock. It was developed by technical analyst Welles Wilder.
RSI is a indication of what is recently happening over a period of time in that stock. It checks for gains and losses. Every stock has a different RSI.
RSI attempts to know the following:
1. Recent gains and losses over a period of time,
2. Measure of speed and change of price movements, and
3. Try to identify overbought or oversold conditions in the trading of the stock or Index.
What Is The Formulae For Strength Index – RSI?
To know RSI two things are required:
1. Find out average gain during specified time frame.
2. Find out average loss during specified time frame.
Then take out the RS value for each closing day.
RS = Average gain of up periods during the specified time frame / Average loss of down periods during the specified time frame.
Average Loss equals the sum of the losses divided by 14 for the first calculation.
For subsequent calculations multiply the prior value by 13, add the most recent value and then divide the total by 14.
Bit complicated but people who trade on RSI values find it.
The same applies to Average Gain.
This is the formulae to calculate RSI:
RSI = 100 – 100 / (1 + RS)
RSI values range from 0 to 100. The default time frame for comparing up periods is 14 trading days.
Note that RS is the most important value to find. You will need to use an Excel sheet to get it done faster.
But you will have to write the closing rates manually.
You can get this data from your broker.
Or historical close data from NSE website:
What To Do With Data of RSI?
Traditionally RSI traders do this:
RSI value of 70 or above indicate that a security is becoming overbought – it is a signal to SELL as the trend may reverse.
RSI value of 30 or below indicate that a security is becoming oversold – it is a signal to BUY as the trend may reverse.
Note: Advanced traders do not only depend 100% on RSI indicators, they also have other signals in place to decide the trend.
For example sudden drop may indicate a SELL signal by RS, but the stock may reverse.
Some traders use extreme RSI values to buy or sell. Like they treat 80+ as overbought and 20- as oversold.
RSI is one of the easiest technical tools there to find out direction of a stock and trade, still you can see how complicated it is. Further there is no gurantee of even 70% success, this is the reason I highly recommend Non-Directional, No Technical Analysis trading.
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