Relative Strength Index (RSI)

#1
Relative Strength Index (RSI)​

One of the problems associated with many technical indicators, such as moving averages, is the sudden shift in their value as a data point from the beginning of the series drops off. For instance, a moving average indicator may suddenly give a trade signal even though the market has remained inactive. This is due to the fact that a large value from x days ago dropped out of the average calculation as a new value was added. One indicator that remedies this situation is Wells Wilder's Relative Strength Index or RSI. This indicator mitigates the impact of the data's volatility by working with percentages.

The RSI indicator in this instance is considerably different from the traditional RSI indicator used in the equity markets. The RSI used in the equity markets compares the performance of a security to the performance of its peers in the same market segment. The RSI used in futures trading compares current price data to previous price data in the same time series. The RSI discussed here compares the magnitude of higher closes to lower closes over last x days in the following manner:

RS = (Sum of positive net changes over the last x days) / x
(Sum of negative net changes over the last x days) / x

RSI = 100 (100 / 1 + RS)

As with many technical indicators, a longer analysis period will reduce the indicator's sensitivity and vice versa. Traders generally use either a 9 or 14 day analysis period. The percentage value generated is generally considered to be overbought at 70 and oversold at 30. The caveat here is to not blindly sell an overbought or buy an oversold market. A strongly trending bull market will remain overbought for a considerable amount of time and money. It is best to look for the RSI cross back below the 70 level before selling and/or wait for the RSI turn lower as the market continues it's rally, allowing you to capitalize on a bearish divergence. The 50% level will often act as potential support for a declining market and resistance for a rising market. Another technique for trading with RSI is to join the trend in trendline breakouts of the indicator itself.

Relative Strength Index (RSI)​
 
#3
If a market is in strong uptrend, RSI will be above 70 (over brought zone) for as long as 'collective market participants' believe in an uptrend.

You will go bankrupt in shorting against an uptrend. RSI says if it is above 70, short it because it is an overbrought zone !

If a market is in strong downtrend, RSI will be below 30 (over sold zone) for as long as 'collective market participants' believe in downtrend.

You will again go bankrupt in buying a falling knife .RSI says if it is below 30, buy it because it is in 'oversold zone' !

All technical indicators are 'lagging indicators'. It tells you what price has done, not what price will do.

Mostly, all technical indicators are derived from stats- moving averages, median, percentage, addition, subtraction etc.

The purest form of trading is price action trading- You are chasing the price directly without putting all kinds of fancy lines on your charts.

So, how to tell what price will do?

The simplest answer is intuition. If you have an experience in understanding the market structure, if you have watched markets live for many years, you will develop an intuition of what is coming next.

This intuition is an inner voice which comes from your right side of brain which tells you (correctly in most cases) what price is going to do next.

To develop that intuition you need to watch the market for many years to get grasp of repeated human behaviors.

We all make a market and we will all repeat our trading behaviors in the market which gets reflected in price.

The early you leave all this technical crap, the better and faster you will progress in learning the right way to trade.
 

d_s_ramesh

Well-Known Member
#5
Thank you, NIKLRAVI,

Greatly said, if not encouraging let us not discourage others beliefs. Getting rid of this natural human tendency to criticize, jealously, greed and discouraging will in large way help in bringing harmony through out the world.
 
#6
hi
in the other tread u have asked the investores to study technical analysis. in this tread u discouarge the same. what type of human behaviour is this?


ravi
Ravi Bhai, a new trader should learn TA, implement it in live trading and then evaluate where he stands.

TA is 'food for thought'. As a new trader, i did learned all the TA and have used all of them in live trading.

After learning TA, if someone is still not making money, then thats the time one need to introspect and learn the way the trades are conducted.

Trading is an 'evolution process'. To start with learning TA and doing mock trades gives you 'food for thought'.

Once your though process is charged, you will find out new, finer and refined ways of trading.
 

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