In this post, I'll talk about RSI and a useful metaphor that can be used to understand RSI.
RSI stands for Relative Strength Index. Obviously, as its name stands, its purpose in life is to visualize relative strengths between two opposing forces during any given time duration.
Actual usefulness of RSI is derived from the fact it has been normalized to have value only between 0 to 100. In other words, RSI is a percentage and is therefore often referred to as "Oscillator". Word Oscillator also clearly suggests that value of RSI will never be steady. It will continue to move from one value to another. In theory, it can attain both 0 and 100 but in real life, it would be very very rare.
To use RSI on charts, there are 3 numeric parameters that we need to understand and be prepared to configure (modify) as per the trade dynamics.
First one is off course, number of price-bars that the RSI is supposed to be computed over. This is usually called "Lookback" period or simply Period.
Second configurable parameter is is upper threshold and the third configurable parameter is lower threshold (What else didya expect?)
Typically used values (defaults) for these are 14, 70 and 30 respectively.
Now, what metaphor can be used to understand this? Actually it is Very simple. RSI can be understood easily by applying Indian favorite game of .... ... Kabbadi .... :clap:
As with Kabbadi, ground is divided into four parts by drawing 3 lines. First two line are obvious. Upper and lower thresholds. Third very important line (which is always drawn on Kabbadi grounds but not drawn on charts is the middle line (Most charting software allow you to plot middle line).
Just as with Kabbadi, Opponents i.e. Bulls and Bears take alternate turns to attempt excursions into territory of the opposites.
Just as with Kabbadi, how far can they actually get into the opponent's territory depends on their ability to hold their breadth (ability to hold onto profits or losses a.k.a. deep pockets)
The path that Bears and Bulls traverse while playing Kabbadi is visualized for us traders by the RSI .
Just as with Kabbadi, only the unskilled players will attempt to approach the opponent's side in a straight line.
When the Bull is in his own area, there is no excitement. Little excitement and interest around him starts when he crosses the middle line. As he ascends higher, more and more people are crossing fingers, chewing pencils and watching for the tussle to begin.
When the Bull reaches upper threshold or crosses into Bear's territory, Bears start crowding around him and eventually succeed in capturing him. (Bull books profits and exits that session of game). If a Bull does not act wisely and holds onto his Long positions (his breath), he will be very unceremoniously lifted and thrown back into his own territory with his bones shattered (forced to book losses)
Of course, not all Bulls are brave (deep pocketed). Some see the upper threshold up ahead, dump their breadth and run out of the ground (book profits early)
When Bear in his own area, there is no excitement. Little excitement and interest around him starts when he crosses the middle line. As he descends lower, more and more people are crossing and uncrossin legs, chewing pan masala (yeah, yeah, Its banned but only on paper) and watching for the tussle to begin.
When the Bear reaches upper threshold or crosses into Bull's territory, Bulls start crowding around him and eventually succeed in capturing him. (Bear books profits and exits that session of game). If a Bear does not act wisely and holds onto his Short positions (his breath), he will be very economically lifted and thrown back into his own territory with all his blood oozed out of him (forced to book losses)
Of course, not all Bears are brave (deep pocketed). Some will see the lower threshold on horizon and square off their positions (lose their breadth) and run out of the ground (book profits early)
Now, for some differences. There is one very important difference. In any Kabbadi game, there is only player at any time either running up or down. You can imagine market as a very big ground (size of earth helps) where there are innumerable Kabbadi games going on. Same player is sometimes running up as Bull, sometimes running down as Bear, sometimes doing both at the same time on N number of grounds.
Just as with SARS and Candles (Tom and Jerry), this infinite session of Kabbadi never ends.
So, this is how the RSI works. RSI can tell you the status of one particular ground or can be averaged to tell you status of all grounds together.
RSI (dear sweet RSI) keeps telling you where that last horde of Bulls or Bear was.
Players keep coming back to play one more session as long as their dear wife does not scream them out of the game.
Enjoy
Asta la vista
RSI stands for Relative Strength Index. Obviously, as its name stands, its purpose in life is to visualize relative strengths between two opposing forces during any given time duration.
Actual usefulness of RSI is derived from the fact it has been normalized to have value only between 0 to 100. In other words, RSI is a percentage and is therefore often referred to as "Oscillator". Word Oscillator also clearly suggests that value of RSI will never be steady. It will continue to move from one value to another. In theory, it can attain both 0 and 100 but in real life, it would be very very rare.
To use RSI on charts, there are 3 numeric parameters that we need to understand and be prepared to configure (modify) as per the trade dynamics.
First one is off course, number of price-bars that the RSI is supposed to be computed over. This is usually called "Lookback" period or simply Period.
Second configurable parameter is is upper threshold and the third configurable parameter is lower threshold (What else didya expect?)
Typically used values (defaults) for these are 14, 70 and 30 respectively.
Now, what metaphor can be used to understand this? Actually it is Very simple. RSI can be understood easily by applying Indian favorite game of .... ... Kabbadi .... :clap:
As with Kabbadi, ground is divided into four parts by drawing 3 lines. First two line are obvious. Upper and lower thresholds. Third very important line (which is always drawn on Kabbadi grounds but not drawn on charts is the middle line (Most charting software allow you to plot middle line).
Just as with Kabbadi, Opponents i.e. Bulls and Bears take alternate turns to attempt excursions into territory of the opposites.
Just as with Kabbadi, how far can they actually get into the opponent's territory depends on their ability to hold their breadth (ability to hold onto profits or losses a.k.a. deep pockets)
The path that Bears and Bulls traverse while playing Kabbadi is visualized for us traders by the RSI .
Just as with Kabbadi, only the unskilled players will attempt to approach the opponent's side in a straight line.
When the Bull is in his own area, there is no excitement. Little excitement and interest around him starts when he crosses the middle line. As he ascends higher, more and more people are crossing fingers, chewing pencils and watching for the tussle to begin.
When the Bull reaches upper threshold or crosses into Bear's territory, Bears start crowding around him and eventually succeed in capturing him. (Bull books profits and exits that session of game). If a Bull does not act wisely and holds onto his Long positions (his breath), he will be very unceremoniously lifted and thrown back into his own territory with his bones shattered (forced to book losses)
Of course, not all Bulls are brave (deep pocketed). Some see the upper threshold up ahead, dump their breadth and run out of the ground (book profits early)
When Bear in his own area, there is no excitement. Little excitement and interest around him starts when he crosses the middle line. As he descends lower, more and more people are crossing and uncrossin legs, chewing pan masala (yeah, yeah, Its banned but only on paper) and watching for the tussle to begin.
When the Bear reaches upper threshold or crosses into Bull's territory, Bulls start crowding around him and eventually succeed in capturing him. (Bear books profits and exits that session of game). If a Bear does not act wisely and holds onto his Short positions (his breath), he will be very economically lifted and thrown back into his own territory with all his blood oozed out of him (forced to book losses)
Of course, not all Bears are brave (deep pocketed). Some will see the lower threshold on horizon and square off their positions (lose their breadth) and run out of the ground (book profits early)
Now, for some differences. There is one very important difference. In any Kabbadi game, there is only player at any time either running up or down. You can imagine market as a very big ground (size of earth helps) where there are innumerable Kabbadi games going on. Same player is sometimes running up as Bull, sometimes running down as Bear, sometimes doing both at the same time on N number of grounds.
Just as with SARS and Candles (Tom and Jerry), this infinite session of Kabbadi never ends.
So, this is how the RSI works. RSI can tell you the status of one particular ground or can be averaged to tell you status of all grounds together.
RSI (dear sweet RSI) keeps telling you where that last horde of Bulls or Bear was.
Players keep coming back to play one more session as long as their dear wife does not scream them out of the game.
Enjoy
Asta la vista
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