| Making Online Trades Using the Relative Strength Index |
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| Written by Chris Blanchet |
| Wednesday, 17 June 2009 14:25 |
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Investors who want to learn stock market investing often turn to technical analysis for objective and unbiased guidance as to when they should enter or exit a particular position. As discussed in other parts of this Technical Analysis series, some events are simpler to determine than others, especially for people who are just starting to learn stock market investing techniques. The Relative Strength Index (RSI) of a security would be medium-difficult.
Investors who want to learn stock market investing often turn to technical analysis for objective and unbiased guidance as to when they should enter or exit a particular position. As discussed in other parts of this Technical Analysis series, some events are simpler to determine than others, especially for people who are just starting to learn stock market investing techniques. The Relative Strength Index (RSI) of a security would be medium-difficult. What is the Relative Strength Index (RSI) The RSI is an oscillator that measures a security's "relative strength" against its own price history. This technical indicator allows the investor to determine whether the security is currently overbought or oversold and, in fact, provides a better indication of support and resistance levels than the security's price chart would. How Relative Strength Works Unlike some of the other oscillators covered in our technical analysis series, the RSI is plotted on a scale of 0 to 100. The key levels to remember are 0 to 30 for oversold, 30 to 70 for in range, and 70 to 100 for overbought. Depending on the investor's strategy, these numbers can have different trading implications. 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. Using the RSI to Make Trades While other oscillators might provide clear-cut buy and sell signals, the RSI provides more than that and is consequently a little more abstract. First the RSI can often give investors a clearer indication of support and resistance levels than the underlying security's price chart can. Second the RSI provides only overbought (70 to 100) and oversold (0 to 30) readings. Investors might stay away from a buy opportunity that shows up in the overbought range, and might likewise avoid going short when the RSI read oversold. Since RSI provides bearish and bullish signals, the trade decision will have to be made by the investor. Today, trading software makes good use of the RSI and other technical analysis signals to make simple buy and sell recommendations. An absence of this type of advanced software would make manually charting the RSI an extremely time consuming and intellectually draining affair. For investors who want as hand off an experience with the decision making as possible, some software will even give simple buy or sell signals, making the experience more enjoyable for many. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. 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. |