Trading Online Based On The Relative Strength Index
People who are trying to learn stock market investing techniques will often rely a little too heavily on technical analysis when it comes to determining entry and exit points in their positions. That is why many different tools and events are recommended to confirm or refute a particular event. As mentioned in other areas of this Technical Analysis Series, some parts of technical analysis are easier to compute than others. RSI (relative strength) is considered medium to 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.
Figuring out the RSI In terms of mathematics, maintaining an ongoing RSI chart is more involved than some other technical analysis calculations. To figure out a security's RSI, we use this formula: 100 - [100/(1 + A)] where A consists of the average "up" days divided by the average "down" days over a predetermined time frame. For example, if a stock closes up 7 days and down 7 days of the past 14 days, then the RSI would be 50.
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.
Trading software can alleviate a lot of the time consuming and draining calculations needs to produce a solid buy or sell signal. Although technical analysis involves many aspects and signals, such software can change an individual investor's experience from overwhelmed to simple... or at least make it simpler.
Article Source: FxTradingStock.com
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.
by: Chris Blanchet
Total views: 93
Word Count: 474
Date: Thu, 18 Jun 2009
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