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Relative Strength Index (RSI)

A widely used technical analysis indicator, the Relative Strength Index (RSI) gauges the momentum and strength of a stock. The concept was developed by J. Welles Wilder in 1978. RSI is determined by comparing relative strengths, normally over the past 14 trading days. The general methods for calculating RSI are as follows:

  1. Determine the price change for each trading day by calculating the variation between the day’s closing price and the day before’s closing price.
  2. Calculate the cumulative price changes on days when prices increased (Positive Sum), followed by the sum of variations on days when prices decreased (Negative Sum).
  3. Calculate the RSI value by applying the following formula:
    RSI = 100 – (100/ (1 + (Positive Sum / Negative Sum))).

The RSI is between 0 and 100. A region exceeding 70 is typically regarded as overbought, while a region falling below 30 is typically regarded as oversold. An RSI value in roughly the range of 50 indicates that buyers and vendors are similar. The application of the Relative Strength Index (RSI) is complex. The following are popular applications:

  1. The price may be excessively high and the trend or correction may be imminent when the RSI is in the overbought zone; conversely, if the RSI is in the oversold zone, the price could possibly be extremely low and the trend or recovery may be imminent when it is in the oversold zone.
  2. A weakening signal occurs when the RSI fails to follow the new high of the stock price, suggesting an impending decline; conversely, a strengthening signal is suggested when the RSI does not follow the new low of the stock price, indicating an imminent rise.
  3. A divergence in the RSI, which occurs when the price simultaneously reaches a new high or low while the RSI fails to do the same, could potentially signify an increased probability of a trend reversal. (refer to image)

It is important to remember that when applying the relative strength index (RSI) as a technical indicator, it must be interpreted and applied with caution. Additionally, it should be utilized in conjunction with other indicators and analysis methods. The relative strength index (RSI) could draw varying responses and conclusions from different trading assets and markets. Consequently, traders are advised to adjust their assessments and evaluations to particular circumstances.

When the RSI surpasses 70, for instance, investors might conclude that the stock price is excessively high and consequently exit the market with profits. Nonetheless, subsequent opportunities for rising prices are lost as the stock price continues to rise; if the RSI enters the market below 30, it will confront There is a possibility that the stock price will continue to decline, and investors may become tangled in the situation due to the RSI.


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