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Trading Online Based On The Relative Strength Index

By: Chris Blanchet.

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 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: http://www.bigfreearticles.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.

Tags: finance, investing, online trading, technical analysis, trading techniques, trading systems, investing, trading

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