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Trading Strategy With RSI Calculation

The document discusses the formula and calculation for the Relative Strength Index (RSI) indicator. It provides the default setting of 14 days but notes that this can be adjusted. It then lists 5 key roles of the RSI including trendline application, pattern breakouts, advance signals, the importance of the 50 line, and failure swings. The document uses charts and examples to illustrate how the RSI can provide trading signals.

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2K views28 pages

Trading Strategy With RSI Calculation

The document discusses the formula and calculation for the Relative Strength Index (RSI) indicator. It provides the default setting of 14 days but notes that this can be adjusted. It then lists 5 key roles of the RSI including trendline application, pattern breakouts, advance signals, the importance of the 50 line, and failure swings. The document uses charts and examples to illustrate how the RSI can provide trading signals.

Uploaded by

jamal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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RSI Calculation

The formula for relative


strength index calculation
is as follows –
RSI = 100 – 100 / (1 + RS)
RS = Average Gain over
specified period/ Average
loss over the same period
The default setting for
Relative Strength Index is
14, but you may change
this value to decrease or
increase sensitivity based
on your requirement.

For instance, 12-


day RSI is more
likely to reach
overbought or
oversold levels
than 24-day RSI.
5 Important
Roles of
Relative
Strength Index.
Apart from reading
overbought and
oversold condition,
there are certain
special features in
relative strength
index. Those are as
follows-
1. Trendline
Application
It is an interesting fact
that relative strength
index and the closing
chart almost go hand in
hand.
Sometimes it becomes
difficult to differentiate
which one is RSI and
which one is the closing
chart.

We apply trend lines


in the closing chart
may it be up or down.
Similarly, we can
apply closing trend
lines in the same
manner in RSI.

Learn to use RSI


Inicator strategies in
just 2 hours by market
EXPERTS
It is interesting to know
that RSI trend lines
would be broken at
least 3-4 days before
and this gives an
advanced signal that
price is going to break
the same trend line
within a day or two.
The above is the
chart of LIC Housing
Finance and as we
can see that RSI
already gave an
advanced sell signal.

The first sell signal


came on 9th May
2017 when RSI
breaches the
uptrend line and the
second sell signal
came in on 14th June
2017,
when the RSI bounced
after breaching the
uptrend line and faces a
strong resistance from
the uptrend line in RSI
as shown in the chart.
Soon after the
second sell signal
came in, the stock
corrected about 25%
from its high .
2. Pattern
Breakout
We know that formation of
pattern is an interesting
phenomenon in building of
the chart. Any pattern may
it be reversal or
continuation will stage a
breakout at a particular
point of time.
It is again interesting to
know as RSI considers the
underlying relative
strength of a stock over a
specified period of time.
Such breakout will occur
at least 2-3 days in
advance in RSI which price
will follow in due course.
The above is the chart
of Future consumer
where there was
aHead And Shoulder
Pattern was there in
RSI. At the same time
there was a double top
formation at the top and
M-top formation in
Bollinger bands which
rather confirmed our sell
signal. Soon after the RSI
line breached the
neckline, there was a
good correction in the
price.
3. Advance
breakout and
breakdown
The concept of advance
breakout and breakdown
works wonderfully in OBV
indicator .
The same logic is true also in
case of RSI.
Advance breakout implies
when the indicator (RSI here)
has breached the previous top
while the price hasn’t
breached the previous top
yet.

So it’s basically an
advanced or early signal
which indicates that price
will also follow the
indicator in the coming
few sessions.
The below is the chart of
Sanghvi movers, as we
closely watch the RSI line,
we can see that RSI already
breached the previous
resistance but the price still
hovering below the
previous resistance.
Soon after the price
breakout, the stock
witnessed a good rally.
Similarly, in case of advanced
breakdown, the indicator has
breached the previous bottom
but the price is still below or at
the previous bottom, thus
giving an early signal that the
price may soon break the
previous bottom and see some
correction in the coming days.

The below is the price chart


of Asian paints where we can
clearly see that relative
strength index(RSI) breached
its previous support quite
before. Soon after the price
also followed the same and
witnessed a strong correction
almost from its highs.
4. Role of 50
In relative strength index, the
mid 50 line acts as a very
important line to indicate the
price direction.
It is usually seen that the price
continue to stay above the mid
50 line during the bullish phase
while it faces strong resistance
from the 50 line in RSI during
the bearish phase of the
market.
However, there may be a lot of
whipsaws in the daily chart, so
it’s better to look at the bigger
timeframe chart say weekly
chart.

The above is the chart of


Tata Motors and we can see
that whenever
the RSI is maintaining
above the mid 50 line, the
stock was in the bullish
mode while when the
price was below the mid
50 line, the stock showed
good correction.
In short, we can say that
the mid 50 line in RSI acts
as a good trend changer.

5. Failure swing
A bullish failure swing forms
when RSI moves below 30
(oversold), bounces above 30,
pulls back, holds above 30 and
then breaks its prior high.
It is basically a move to oversold
levels and then a higher low
above oversold levels.
The below is the chart of Asian
Paints where there is a clear
failure swing in RSI. Soon after
the resistance got broke in RSI,
the stock witnessed a good rally.

A bearish failure swing


forms when RSI moves
above 70, pulls back,
bounces, fails to
exceed 70 and then
breaks its prior low.
It is basically a move to
overbought levels and then a
lower high below overbought
levels.
The below is the chart of SBI
where there is a clear Failure
swing in RsI
Soon after the support was
broken in relative strength index,
the stock saw a good correction
within a month’s time.

Frequently Asked
Questions
What Is a Good RSI
Indicator?
Traders who are looking for
investment opportunities
should look for RSI values that
hit 30 or fall below that level.
This allows them to look for
investment options that may be
undervalued where the price
may increase in the future. But
it's important for investors to
remain steadfast and avoid
making hasty decisions, since
market conditions can change
at a moment's notice.
Is There a Better
Indicator Than the
RSI?
The RSI measures how quickly
the price of an asset moves. It is
commonly used when markets
are trending. But other trade
signals can help traders when
overbought and oversold asset
prices don't change course right
away. For instance, the moving
average convergence divergence
and moving average crossovers
both allow traders to verify RSI
indicators.
What Does It Mean
if a Stock Is
Overbought?

A stock that is
overbought trades at a
price above its intrinsic
or fair value. This means
it doesn't trade at its
true worth. Rather, it's
trading at a price that's
much higher than what
it should be.
What Does It Mean
if a Stock Is
Oversold?
When a stock is
oversold, it trades at a
price below its intrinsic
value. Put simply, it
trades at a price that's
much lower than it
should. This means that
it's worth much more
than the price that it's
trading at in the
market.

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