The Basics of RSI (Relative Strength Index)

 RSI (Relative Strength Index) indicator Developed by J. Welles Wilder,  This indicator is a momentum oscillator is used to measure the speed and strength of the market move. RSI (Relative Strength Index) indicator line oscillates between zero and 100. According to developer J. Welles Wilder. Rsi considered overbought when the line moves above 70 and oversold when below 30. This indicator used to identify a general trend in the market.

Indicator Type

This is a momentum oscillator indicator oscillated between zero and 100.

Markets

All cash market and futures, (please note:- this indicator not for options market)

Work best

All-time frame and very good work in trending market conditions.

Formula

RSI (Relative Strength Index) indicator is a momentum oscillator and this indicator line oscillates between o to 100. This indicator looks at a ratio of the average size of the up-classes over the past “number” periods and compares to the average size of the down-closes. And indicator gives you result in ratio figure between o and 100. This indicator value is smoothed exponentially using the same “number” period parameter. RSI (Relative Strength Index) indicator two type calculation.

1) First calculation for average gain and average loss are simple previous 14 periods 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.

2) The second calculation is 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.
This indicator help for identify clear-cut market strength. Default periods setting is 14 and you easily able to change this setting. But 14 periods setting is perfect for the short-term and medium-term trader.

 

Parameters

Relative Strength Index (RSI) Parameter depended on trader holding time periods, for example, a short-term trader using (RSI) low periods and opposite site long term trader using (RSI) high periods settings.

  • Foreign Exchange:- 5 and 9

  • Fixed Income:- 9

  • Stock:- 14

  • Index:- 9 and 14

  • Commodities:- 14

Default periods settings are 14 mostly charting tools. This indicator gives you strong overbought and oversold in the market. If (RSI) line indicate above 70 its mean this is an overbought situation and opposite side if (RSI) line indicate below 30 its mean this is an oversold situation. Short term traders sometimes use 2 periods (RSI) setting look for overbought reading above 80 and oversold reading below 20.

Theory

Relative strength index (RSI)  helpful in identifying overbought and oversold situations in the market. If (RSI) below 30 its do not mean this is a bottom of the market because sometimes (RSI) give you again and again below 30 and 30 levels because of its mean market in a strong downtrend. opposite side some (RSI) indicated above 70 level, again and again, its mean this is a very strong uptrend.

Interpretation

Relative strength index (RSI) oscillated at 0 to 100 levels. If (RSI) indicated above 70 level its mean this is a possibility of an overbought situation. Opposite site (RSI) indicated below 30 level its mean this is a possibility of the oversold situation. Please note it’s not a mean after 70 and 30 level’s market immediately reverse once of these level reached Please wait at list 50 level because this is a very important level market cross this levels after that make any decisions.

                   This oscillator is very good working in trending market bullish and bearish anywhere. And trading chanakya hope this indicator will be very helpful for your trading future. This indicator gives you most of time very strong signal and all type trader using this indicator like:- intraday trader, short-term trader, long-term trader and many more. (RSI) very good work with trend finder indicator combination because RSI indicated you market trend strength and if you using with trend finder indicator so this combination gives more accurate buying and selling signals. We hope this indicator help you to make lots of money.

Math

(RSI) = 100-100/(1+Rupees)

RS =

  • Average of 14 previous periods up closes (if your parameter setting is 14)

  • Average of 14 previous periods down closes (if your parameter setting is 14)

RSI values are smoothed manner after the averages of previous up closes price and down closes price divided by n-1.

  • Average up close = (previous average up close x (n-1) + current up close) / n.
  • Average down close = (previous average down close x (n-1) + current down close) / n.

Overbought-Oversold

Very simple interpretation of this indicator above 70 its meaning overbought situation and opposite side below 30 level its meaning oversold situation in the market.

rsi indicator image no 1
this is caption image for rsi indicator image no1

See this Punjab national bank stock chart if (RSI) indicate you below 30 level on (7-17-2006) Punjab national bank stock price is 65 rupees. After three months (RSI) line showing above 70 level and this time, Punjab national stock price is 107 rupees. This is a power of this indicator and these approx 42 rupees difference its mean price up 70 percent only in three months. (10-2-2006) RSI showing 70 level and this time Punjab national bank stock price are 107 rupees. After three month later RSI line indicate near 30 level and this time Punjab national bank stock price is 80 rupees. This is 30% percent down moment.

Divergences

According to developer Welles Wilder, divergences signals a very good reversal signal because directional momentum does not confirm a price. A bullish market condition divergence occurs when the underlying (script) makes a lower low and RSI forms the higher low. RSI does not confirm the lower low and this indicator show only momentum strength in the market. Opposite side a bearish market condition divergence forms when the (Script) shows higher high and RSI forms in lower high. It’s not a confirm the new high this situation show only weakening momentum. Please see the image 2 this chart show Punjab national bank stock with the bearish divergence in December month This Stock moved with the new high in December month and RSI indicated lower high for the bearish divergence and after this breakout stock price dropdown very fast.

alt text bearish divergence rsi indicator
caption image for bearish divergence RSI indicator

 

image 3 bullish divergence
caption image for bullish divergence image3


In dlf stock, a bullish divergence formed in November to December. Stock price continuously shows lower low breakout but divergence show higher low and after this divergence breakout stock price move in upside very fast.

(Please note:- some time in strong uptrend/downtrend give wrong signals because in very strong trend situation divergence not working so do not ignore stop loss.

Failure Swings

developer Welles Wilder considered failure swings very strong signal for market reversal with good market strength. Failure swings are independent of price action and breakout. A bullish failure swings scenario show on if RSI indicates below 30 oversold level and bounce above 30, and breakout previous RSI high point this is a very strong signal and this scenario indicate this is starting of the bullish trend. See on image 4

alt test bullish failure swing
caption image bullish failure swing


A bearish failure swings scenario show on if RSI indicated above 70 overbought levels and bounce above 70, and breakout previous RSI low point this is a very strong signal and this scenario indicate this is starting of the bearish trend. see on image 5

alt text image for bearish failure swings
caption image for bearish failure swings

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