Technical analysis is one of the most popular trading methods in the market. Technical analysis uses technical indicators to predict the future direction of an asset. These indicators are developed using complex mathematical calculations.
There are hundreds of indicators in the market today. Most of these indicators were developed decades ago and are still in use today. The Relative Strength Index (RSI) is one of the most popular technical indicators in the market.
What is RSI or Relative Strength Index?
The RSI or Relative Strength Index was developed in the 1950s by Welles Wilder. Wilder was a well-known trader and author who is also credited for developing other indicators. The RSI is a momentum indicator or a leading indicator that measures the speed and change of price movements. It indicates strength and momentum in a trade.
It is an indicator that moves from zero to 100.
The RSI is calculated using a very simple formula. First, you calculate the Relative Strength. This is done by dividing the average gain with the average loss during a particular period. The most popular period is 14 days.
You then add the RS with 1. You divide the result by 100. The final RSI number is derived by subtracting this result from 100. As with all the other indicators, you don’t need to do these calculations by yourself.
The best approach is to simply know how to apply and interpret them.
Biggest Mistake you should avoid while using RSI.
- Most of the people use the general setting in the market i.e., overbought level (strength zone) of 80 and oversold level (weakness zone) of 20. Few people also use overbought level of 70 and oversold level of 30.
- We consider this as the biggest fault while trading.
- We prefer saying over bought level as strength zone and over sold level as weakness zone.
- But when we trade, we instead keep the setting; 60 as strength zone that is the upper band and 40 as weakness zone that is the lower band.
- Whenever market is above 60 levels, market has strength and you can take a bullish trade.
- Whenever market is below 40 levels, market has weakness and you can go short that is bearish trade.
- Whenever RSI moves between 60 and 40 levels, market is range-bound and you should not look for a big move. Time is to take a trade when RSI moves above 60 or below 40.
- This strategy is applicable in all time frame that is weekly, daily, hourly, etc.
Money Making Trading Course (MMTC) by Tushar Ghone and Amruta Ghone is committed to providing an Advance level Technical Analysis course with 50hrs training at a nominal price. Our main aim is to enhance student’s financial knowledge and teach them profitable trading strategies. We also provide training for the next 6months along with daily Equity and options Analysis on our telegram Channel. https://telegram.me/MMTC123
We at Tstock Mantra Investments by Amruta Tushar Ghone provide complete Financial Planning for an individual i.e., Mutual Funds, Insurance planning, Retirement planning, and so on.
For more information about trading and stock market visit our blog page.