Saturday, July 21, 2007

Relative Strength Index (RSI)

Relative Strength Index (RSI)

Introduction
Developed by J. Welles Wilder and introduced in his 1978 book, New Concepts in Technical Trading Systems, the Relative Strength Index (RSI) is an extremely useful and popular momentum oscillator.

The RSI compares the magnitude of a stock's recent gains to the magnitude of its recent losses and turns that information into a number that ranges from 0 to 100. Like most indicators, the RSI only needs one stock to be computed.

Calculation
n = number of days
Average gain = (total gains/n)/(total losses/n)
For First RS = (Aver.Gain/Aver Loss)
RSI=100-(100/1+RS)

Interpretation
Overbought/Oversold
If the RSI rises above 30 it is considered bullish for the underlying stock.
If the RSI falls below 70, it is a bearish signal.

Trading Signals & Divergences
Buy and sell signals can also be generated by looking for positive and negative divergences between the RSI and the underlying stock.

Positive divergence
Buy when price and the Relative Strength Index are both rising.
Sell when the price and the RSI are both falling.

Negative divergence
Buy when price falls and but RSI does not fall instead goes up.
Sell when the price goes up and but RSI does not go up instead falls by good margin

The underlying stock will often reverse its direction soon after such a divergence.

To Calculate Formula in Excel For RSI
Column,Description, = Formula To Enter,Cell No. to Enter
A=DATE
B=OPEN
C=HIGH
D=LOW
E=CLOSE
F=VOLUMES

To compute Gain/Loss:
G = % Change, =E3-E2, In G3 & AutoFill (Copy)( Press Shift +D on Kybrd)

To compute Gain only:
H= Advance, =IF(G3>0,G3,0) ,In H3 & AutoFill (Copy)( Press Shift +D on Kybrd)

To compute Average Loss:
K=Average Losses,=AVERAGE(I3:I16),In K16 & AutoFill (Copy)( Press Shift +D on Kybrd)

L=For First RS,= (Aver.Gain/Aver Loss)
L=RS,=ABS(J16/K16),In L16 & AutoFill (Copy)( Press Shift +D on Kybrd)

M=RSI(14 day),=100-(100/1+RS)
M=RSI,=IF(K16=0,100,100-(100/(1+L16))),In M16 & AutoFill (Copy)( Press Shift +D on Kybrd)


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