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RSI

The Relative Strength Index (RSI) is a momentum oscillator that compares the extent of a stock’s recent gains to the extent of its recent losses, and converts this into a number that ranges from 0 to 100. The average up moves over a number of periods is divided by the average down moves over the same period, with the default period being RSI (14). The indicator is used to identify if a stock is overbought or oversold.


RSI works best when the market’s price is trading within a sideways range. As RSI approaches 70, it is an indication that the market may be getting overvalued (overbought), and price is likely to pull back. As RSI falls to 30, it is an indication that the market may be getting undervalued (oversold), and a reversal may occur. Technical Analysts would generally consider RSI falling below and then rising back above 30 to be a bullish buy signal. Whereas when RSI rises above and then falls back below 70, this is considered a bearish sell signal.


In a trending market, the signals can be adjusted. For example in a bull market the RSI tends to fluctuate between 40 and 90, with the 50-60 zone acting as a support level and a buy signal being generated when RSI falls below 40 and rises back above 40. In a bear market, the RSI tends to fluctuate between 10 and 60, the 40-50 zone acting as a resistance level, with a sell signal being generated when RSI rises above 60 and falls back below 60.


You can also use RSI to confirm the trend. During an uptrend the RSI would typically be above 50, during a down trend the RSI would be below 50.


Another method of using the RSI is to trade divergences - this is where the market’s price trend doesn’t agree with the trend of the indicator and provides an indication that the current trend may be near ending. The method works on the assumption that when a divergence occurs between a indicator and price, the price generally changes direction to confirm the trend shown by the indicator.


The RSI is a momentum indicator, so when price is in an uptrend and making new highs but the RSI fails to make new highs, this implies the price is running out of momentum and a price reversal is due. In such a situation, the RSI falling below 50 would provide confirmation of the reversal and act as a sell signal.


Where price is in a downtrend (making new lows) but the RSI forms a higher low, this implies that upside momentum is increasing and a price reversal is due. In such a situation, the RSI rising above 50 would provide confirmation of the reversal and act as a buy signal.


Strategies

  • Bullish signal: RSI crossing above 50
  • Bearish signal: RSI falling below 50
  • Bullish signal: RSI crossing below 30 and turning up
  • Bearish signal: RSI crossing above 70 and turning down


RSI Formula

The RSI indicator is based on the ratio of the strength of the average upward price relative to the downward price action over Failed to parse (MathML with SVG or PNG fallback (recommended for modern browsers and accessibility tools): Invalid response ("Math extension cannot connect to Restbase.") from server "https://api.formulasearchengine.com/v1/":): {\displaystyle n} periods, where the default Failed to parse (MathML with SVG or PNG fallback (recommended for modern browsers and accessibility tools): Invalid response ("Math extension cannot connect to Restbase.") from server "https://api.formulasearchengine.com/v1/":): {\displaystyle n} periods is 14.


To calculate the RSI, first calculate the Upward and Downward Price change on each price interval:


Upward Change = Failed to parse (MathML with SVG or PNG fallback (recommended for modern browsers and accessibility tools): Invalid response ("Math extension cannot connect to Restbase.") from server "https://api.formulasearchengine.com/v1/":): {\displaystyle \displaystyle \quad IF \qquad \text{CLOSE } > \text{ PAST CLOSE} \quad THEN \qquad (\text{CLOSE } - \text{ PAST CLOSE}) \quad ELSE \qquad 0 }


Downward Change = Failed to parse (MathML with SVG or PNG fallback (recommended for modern browsers and accessibility tools): Invalid response ("Math extension cannot connect to Restbase.") from server "https://api.formulasearchengine.com/v1/":): {\displaystyle \displaystyle \quad IF \qquad \text{CLOSE } < \text{ PAST CLOSE} \quad THEN \qquad (\text{PAST CLOSE } - \text{ CLOSE}) \quad ELSE \qquad 0 }


Now calculate the Average Upward and Downward change in price:


Failed to parse (MathML with SVG or PNG fallback (recommended for modern browsers and accessibility tools): Invalid response ("Math extension cannot connect to Restbase.") from server "https://api.formulasearchengine.com/v1/":): {\displaystyle \text{Average Upward Price } = \displaystyle \left ( \text{Previous Average Upward Price } + \left ( \displaystyle \frac { \text{Upward Price } - \text{ Previous Average Upward Price} } { n } \right ) \right ) }


Failed to parse (MathML with SVG or PNG fallback (recommended for modern browsers and accessibility tools): Invalid response ("Math extension cannot connect to Restbase.") from server "https://api.formulasearchengine.com/v1/":): {\displaystyle \text{Average Downward Price } = \displaystyle \left ( \text{Previous Average Downward Price } + \left ( \displaystyle \frac { \text{Downward Price } - \text{ Previous Average Downward Price} } { n } \right ) \right ) }


where Failed to parse (MathML with SVG or PNG fallback (recommended for modern browsers and accessibility tools): Invalid response ("Math extension cannot connect to Restbase.") from server "https://api.formulasearchengine.com/v1/":): {\displaystyle n} is typically 14 periods.


The RSI is then calculated as follows:

Failed to parse (MathML with SVG or PNG fallback (recommended for modern browsers and accessibility tools): Invalid response ("Math extension cannot connect to Restbase.") from server "https://api.formulasearchengine.com/v1/":): {\displaystyle \text{RSI} = \displaystyle 100 - \left ( \frac { 100 } { 1 + \left ( \displaystyle \frac {\text{Average Upward Price}} {\text{Average Downward Price}} \right ) } \right ) }


RSI Indicator

The RSI indicator can be displayed on the TimeToTrade charts. To add the RSI indicator to the TimeToTrade charts, go to the chart settings and click on the 'Add Indicator' button. Click on the search box and type the name of the indicator that you are looking for, or for example type RSI and scroll through the results:


Generic Indicator Settings 1.png


After adding the RSI indicator, within the chart settings, click on it to set the parameters and change colours.



RSI Alerts

Alerts can be set up to provide an Email or SMS text message notification of when your RSI indicator chart conditions have been met, backtest trading strategies or execute demo trades. To learn more:



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The information and data provided is for educational and informational purposes only. Interpretation and use of the information and data provided is at the user's own risk. All information and data on this website is obtained from sources believed to be accurate and reliable. However, errors or omissions are possible due to human and/or mechanical error. All information and data is provided "as is" without warranty of any kind. We make no representations as to the accuracy, completeness, or timeliness of the information and data on this site and we reserve the right, in its sole discretion and without any obligation, to change, make improvements to, or correct any errors or omissions in any portion of the services at any times. Past performance is not a guarantee of future results. Trading carries a high level of risk to your capital and can result in losses that exceed your deposits. It may not be suitable for everyone so please ensure you fully understand the risks involved.


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