Technical Analysis

In this page we would like you to understand the concept of Technical analysis. Many times we hear from the market biggies about the technical movements of Stocks, derivatives & commodities, but never understand what goes behind the screen. We would like to give you insights on commonly used technical analysis tools. 

RELATIVE STRENGTH INDEX 

The RSI (Relative Strength Index) is a well known indicator and is extensively used to measures the relationship between the points gained during the days of rise and the points lost during the days and turns that information into a number that ranges from 0 to 100 with values typically remaining between 30 and 70. It is basically a ratio of the average upward changes to the average downward changes over a given period of time.

The RSI goes on to oscillate between 30 and 70. Higher values indicate overbought conditions (signals of sale) while lower values indicate oversold (indicating buying opportunity). Often a signal of sale is indicated when the RSI falls down under the 70 and of purchase when it passes by again above 30. 50 is the zone of balance. A RSI, which passes above 50, is sign of rise. A RSI which passes below 50, is sign of fall.

RSI is typically used with a 9, 14, or 25 calendar day (7, 10, or 20 trading day) period against the closing price of a security or commodity. The more days that are included in the calculation, the less volatile the value. Welles Wilder originally used a 14-day RSI and the 14-day parameter is still used by many traders. However, the 9-day RSI appears to have gained more adherents because it is somewhat faster and more sensitive.

The term 'relative' here does not imply relative strengths between different stocks or between a stock and a stock index’s. It is a measure of the strength of the current stock price relative to its previous price levels.

The general formula for RSI is:
RSI = 100 - [100/(1 + RS)]

Where RS = (Avg Gain) / (Avg Loss)
Avg Gain = Total Gains / n
Avg Loss = Total Loss / n
where, ‘n’ = number of RSI periods

For each stock the RSI value is computed in two ways:

1. Normal RS :
[Total Gain/n]
[Total Loss/n]

2. Smoothed RS:
[(Previous Avg Gain*13) + Current Gain]/14
[(Previous Avg Loss*13) + Current Loss]/14