Ultimate Guide to the Relative Strength Index (RSI)
The Full Form of RSI is Relative Strength Index which is the important indicator of Swing Trading. RSI indicator was introduce by J. Welles Wilder in his book “New Concepts in Technical Trading Systems”. to the trading community. RSI is the one of the best technical indicator & momentum oscillator that measures the speed and change of price movements, RSI oscillates between zero and 100.
RSI shows overall market and individual stock position in National stock Exchange (NSE) & Bombay Stock Exchange (BSE). The RSI is one such indicator that analysts use to determine whether the asset is in an oversold or overbought territory. If it shows a value less than 30, it indicates that the stock, or the index, is in the oversold territory, while a value higher than 70 suggests an overbought status. One can also get the idea of whether the present trend in the stock is intact or is likely to reverse in coming days.
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In the so many articles, interviews, and books over the years have given due credit to the RSI has the most popular momentum oscillator. Most of all technical analyst use RSI indicator to consider the trend of the market i.e. bull market or the bear market and its ranges. RSI indicator also shows when the market will reverse from bull market to bearish and vice versa. So trader can square off his position immediately if the position is against the RSI signal.
RSI Indicator – Multiply Your Profits
Calculation
Relative Strength Index (RSI) = 100 – 100 / (1 + RS)
RS = Average Gain / Average Loss
To simplify the calculation explanation, RSI has been broken down into its basic components like RS, Average Gain and Average Loss. This RSI calculation is based on 14 periods. Losses are expressed as positive values, not negative values.
The very first calculations for average gain and average loss are simple 14-period averages.
- First Average Gain = Sum of Gains over the past 14 periods / 14.
- First Average Loss = Sum of Losses over the past 14 periods / 14
The second, and subsequent, calculations are based on the prior averages and the current gain loss:
- Average Gain = [(previous Average Gain) x 13 + current Gain] / 14.
- Average Loss = [(previous Average Loss) x 13 + current Loss] / 14.
In short RSI is most popular Indicator to shows oversold or over bought position and Running Market Trend .
RSI values range from 0 to 100. The default time frame for comparing the RSI is 14 trading days. A RSI value of 70+ indicate that the stock is becoming overbought or overvalued, and therefore a trend reversal or corrective downtrend can happen in the stock.
Also Read: What is the meaning of square off in intraday?
If RSI of the stock is below 30 ie. 30- can be interpreted as that the RSI is indicating that stock is in the oversold or undervalued condition, which is a signals of a trend reversal in the stock ie. stock is likely to move up and can be brought at current levels for swing trading. The chance of a bounce back is much higher in these stocks,
So to sum up what is a good RSI number, Stocks for which the RSI is approaching 30 are a clear buy on dips and if RSI has hit 70 it’s a clear signal to sell on rallies. We also advised traders that if there is a sell signal on the RSI chart, one needs to look for confirmation from other technical indicators for better gains . Only when other indicators suggest the bearishness, they should short sell the stock in NSE market.
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