Technical Analysis -Part 1

 

RSI- Relative Strength Index

·                 It is one of the most effective and most used technical tool of stock market developed by J. Welles Wilder Jr. and introduced in his seminal 1978 book, "New Concepts in Technical Trading Systems."

·      It is classified as momentum indicator because it measures the velocity and magnitude of price movements. It helps to analyze the strength and weakness of stock or market based on the closing prices of recent trading periods.

·              It has a measurable scale from 0 to 100. There are some default level marked on this scale like 30 and 70 as low and high level which can be changed by the user according to their use and perception.

·        By default it has 14 days time frame which again can be changed by the user as per their convenience.

·        Traditionally it is said that the security above 70 and below 30 are in overbought and oversold zone which is true but at the same time it should not be interpreted that if RSI is 70 or 70+ one has to sell that script as soon as possible because it is in overbought zone. Whenever such condition occurs one should be cautious toward his/her security and should place strict stop loss which can be the low of last price candle or technically it can be determined by the help of ATR (Average True Ratio) and most important investor should consider his risk appetite by himself because he is investing his own hard earned money in a highly volatile and speculative market. Similarly when RSI 30 is obtained it cannot be said that stock is fully oversold and had made bottom now it is time to buy, it can further go down till 0( 0 is almost impossible but it may go to that point also)

       Mathematical Formula = 100-100/(1+RS)

·      Where, RS = Average Gain / Average Loss

Some General levels/Methods which I observed and learned from my Gurus and markets which I can suggest in this article are as

·        Divide the RSI scale in 0-20, 20-40, 40-60, 60-80, 80-90.

·        Now these division can be used effectively with uptrend and downtrend of stock and market like

·        If market/stock(which ever you are analyzing market or stock) is in uptrend and RSI is in between 0-20 it is a strong buy or if trend is downtrend and RSI is 0-20 one should wait for uptrend. Short selling should be avoided in this zone because it is highly risky zone for shorting, reversal can be seen at any point.

·        If market/stock is in uptrend and RSI is in between 20-40 then again it is in buy zone or if trend is down trend then it will be in a sell zone with strict stop loss.

·        If market/stock is in uptrend and RSI is in between 40-60 then again it is a buy(high) zone or if trend is downtrend in the same zone then it is a sell condition.

·        If market/stock is in uptrend and RSI is in between 60-80 then it will a buy zone with high momentum but if there is a downtrend momentum then it is a highly sell indication.

Some spot levels

·        RSI at 20 with Uptrend – Strong buy

·        RSI at 40 with Uptrend – Strong buy

·        RSI at 60 with Uptrend – Strong buy

·        RSI at 80 – Cautious zone – selling can be done ( stock momentum should be considered because some stock may fall from 80 or some 85 or some 90 on the basis of their momentum but at RSI 80 selling zone start)

·        RSI 90( rarely seen) – Strong sell.

·        Similarly when trend is downtrend

·        RSI at 20 cautious

·        RSI at 40 – Strong sell

·        RSI at 60– Strong sell

If RSI makes ‘U’ turn at RSI 20,40,60 then it is strong buy.

 

Some more RSI data at 45 min, 1 day and 1 week chart

·        45 Min chart can be used for intraday

·        1 day chart can be used for short term

·        1 week for positional trade

1)    45 min chart

                                                         
                                                                2)    1 Day Chart

3)    1 Week Chart



 

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