Relative Strength Indicator Strategy
Relative Strength Index or RSI is one of the most popular indicator used in indices trading. It is an oscillator indicator which oscillates between 0 -100. This a trend following indicator. It indicates the strength of the trend, values above 50 indicate a bullish trend while values below 50 indicate bearish Indices trend.
RSI Indices Indicator Measures Momentum of a Indices Trend.
The center-line for the RSI is 50 indicator, cross-over of the center-line indicate shifts from bullish to bearish trend and vice versa.
Above 50, the buyers have greater momentum than the sellers and stock indices trading price on the chart will keep going up as long as this RSI indicator stays above 50.
Below 50, the sellers have greater momentum than the buyers and stock index trading price on the stock indices chart will keep going downwards as long as RSI indicator stays below 50.
RSI Indices Indicator - How to Trade Indices with RSI Technical Indicator
In the index trading example above, when the indicator is below 50, the stock index trading price kept moving in a downward trend. The stock indices trading price continues to move down as long as RSI indicator was below 50. When the RSI indicator moved above 50 it showed that the momentum had changed from sell to buy and that the downward trend had ended.
When the RSI indicator moved to above 50 the stock indices trading price started to move upwards and the trend changed from bearish to bullish. The chart stock index trading price continued to move upwards and the RSI indicator remained above 50 afterwards.
From the stock indices trading example above, when the trend was bullish sometimes the RSI would turn downwards but it would not go below 50, this shows that these temporary moves are just retracements because during all these time the stock index price trend was generally upwards. As long as RSI indicator does not move to below 50 the current trend remains intact. This is the reason the 50 center line mark is used to demarcate the signal between bullish and bearish stock indices trade signals.
The RSI technical indicator uses 14 day period as default period, this is the period recommended by J Welles Wilders when he introduced it. Other oftenly used periods used by Indices traders are the 9 and 25 day moving average.
The RSI technical indicator period used depends on the chart time frame you are using to trade, if you are using day indices chart time frame the 14 period will represent 14 days, while if you use 1 hour chart time-frame the 14 period will represent 14 hours. For our stock index trading example we shall use 14 day moving average, but for your trading you can substitute the day period with the chart timeframe you are indices trading with.
To Calculate RSI Indices Indicator:
- The number of days that a stock index market is up is compared to the number of days that the stock indices market is down in a given time period.
- The numerator in the basic formula is an average of all the indices trading sessions that finished with an upward stock index trading price change.
- The denominator is an average of all the down indices trading market sessions closes for that period.
- The average for the down days are calculated as absolute numbers.
- The Initial RSI is then turned into an oscillator.
Sometimes very large up or down movement in stock indices trading price in a single indices trading session stock index trading price period may skew the calculation of the RSI average and produce a false stock indices signal - whipsaw signal - in the form of a spike.
RSI Center-line: The center-line for this indicator is 50. A value above 50 implies that the stock index market trend is in a bullish phase as average gains are greater than average losses. Values below 50 indicate a bearish phase in the stock indices trading market indices trading prices are generally closing lower than where they opened.
Overbought and Oversold Levels: Wilder set the RSI overbought and oversold levels at which the stock index market moves are overextended at 70 and 30.
