RSI: Critical Interpretation Calculation basis

RSI: Critical Interpretation Calculation basis
RSI is likely Arch. Welles Wilder Jr. 's best-known indicator. It can be found on virtually every site and technical analysis is included with almost all software packages. RSI stands for Relative Strength Index, but the name was wrong. Most relative strength calculations compare with the stock against an index - such as comparing Intel (INTC) to Madrid or $ SOX index. Wilder RSI compares the gains of the stock of its losses over a specified period of time. The result is a graph RSI is usually presented as a panel above or below the price chart.

When first articulated RSI Wilder in his book 1978, new concepts in Stuttgart (ISBN 0-894959-027-8), his methodology involved the use of Hewlett-Packard programmable calculator. Swing trader of that time should follow the logic of a 10-column table to understand how the indicator is built. swing trader from 2004 has significant advantage. With the stroke of a computer key, presto, RSI appears above or below the price chart.

On reflection, however, this ability to effortlessly conjure up RSI, can also be an obstacle. Without understanding the mathematical construction of the indicator, it is easy to use mechanically. Worse, its implications can be misinterpreted, which can lead to poor trading decisions. In future articles will be paid attention to the detailed discussion of how RSI can:
- ". Uplift Failure" To serve as a leading indicator of upcoming response, or twist out of limning
- Trail of the price patterns are difficult to detect the underlying price chart.
- Signal bearish or bullish momentum divergence and thus the possibility of a reversal trend.
- Mimic trendlines on the basic price chart with the establishment of key support and resistance levels.
Many times during these discussions, I will look back at the mathematical reasoning behind the RSI and now I will explain that calculation.

The formula for RSI is:

RSI = 100 - [100 / 1 + RS]

RS = Average of n periods closes / Average of n periods closes.

RSI provides important information on the length of each table, and I used it for 5 minutes, hours, daily, weekly and monthly charts. "N" in the formula RS is the number of periods used in calculation. Propose a bum 14 times as default, but the 9 and 21 period RSI is also commonly used by traders.

If you are mathematically inclined, finding RS may sound intimidating, but actually it is simple. The first step is to gather 14 times the data for each stock or index. In the example below on Intel, I started my RSI calculation of November 1 and collected 14 days of closing prices, because I wanted to do a daily RSI calculation.

The next step is to total all be closed, or daily gains during the 14 days. As the table below shows, Intel gained 17 cents on Nov. 2, 6 November 3 cents, 21 cents, on November 4, etc. The sum of these benefits for all fourteen days was $ 2.77. To find out the average profit for the period, one simply divides the $ 2.77 to 14 to get 19.8 cents.

The same process is repeated down the days. Total decrease in 14-day period were 50 cents, the average drop 3.6 cents.

Next, you need to figure out RS. RS is calculated by dividing the average closing (19.8) than the average closes down
(3.6). This simple calculation (19.8/3.6) gives a score of 5.50.

The formula asks us to then add 1.0 to 5.5, giving us a score of 6.5. To resolve the brackets 100/6.5 share and find that the answer is 15.38.

The final step is to subtract from 15.38 to 100. 100 is included in the formula to ensure that the end result always oscillates between zero and 100. When 15.38 is reduced by 100, we have calculated the RSI of 84.62. That suggests Intel RSI is extremely overbought and is prone to profit taking or "reaction." (Note that Stockcharts further smooths the raw number of RSI by adding additional data points, so his RSI and that the figure will be slightly different.)

One of the goals in creating Wilder RSI was to eliminate unnecessary computations. Once numbers 14th day were established, and he uses 10-column spreadsheet for calculating the subsequent RSI values. An example of a 10 - column spreadsheet with RSI is shown below. Mathematics takes some practice. Logic itself, however, does not change. RSI for 15-19 days (19 to 26 November) are presented in the table.
Below is a table of "Intel covers the period from table 1 to 26 November. In addition to RSI, I also set parabolic SAR and ADX, two other popular indicators Wilder, of the table. Keep in mind that on November 12 RSI went above 70 overbought level. It warned swing trader INTC was significantly overbought. By itself, it was not a sell signal, because the shares can get and stay overbought for extended periods of time when a strong uptrend is in place. It did caution, however, be very alert response and be ready to go for profit.
Intel remained overbought for a few days and reached a peak close to $ 24.80 on Nov. 18. RSI in this moment was extremely 84.62. Note how large series of up days and very few down days led to this extreme reading.

On November 19, Intel declined 64 cents, creating a large black candle. RSI signal as sold dropped from above 70 to below that level. Slower moving ADX, and the rest of the buy signal, saw + DI falls below the black line ADX, often signal peak. The next day INTC lost another 6 cents. Parabolic SAR dots included below the share price to above it, indicating that profits should be taken immediately to the INTC (the Swing Trader ended his position in INTC to this day with 8.1% profit). According to Wilder indicators, however, because ADX was the buy signal, INTC should not be shorted.
Notice how RSI declined on subsequent days as the price fell. In terms of average gains over the last fourteen days, approached the average losses, RSI trended down to 50 levels, the point at which gains and losses during the 14 days are in perfect balance.