Relative Strength Index
Relative Strength Index (RSI) is one of the most useful indicators that are used by a technical analyst in stock trading. It really tells you when to enter and exit positions. Relative Strength Index (RSI) is an oscillator that measures the speed and magnitude of directional movements in stock prices - it compares the relative up and down next to the closing price movement. We can say that this is a measure of the rate of growth or decline in stock prices. Relative Strength Index was developed by J. Welles Wilder.
RSI is an oscillator that ranges between 0 and 100. Since then, the trader can determine overbought and oversold levels, usually 70 or higher for overbought and oversold below 30.
To calculate the relative strength index, we use the two formulas below:
The calculation of the relative strength (RS) and the Relative Strength Index (RSI):
1. Relative Strength (RS) = average price movement upward / downward movement in prices Average
2. Relative Strength Index (RSI) = 100 - 100 / (1 + RS)
Calculate the RSI Using Excel
Before evaluating the relative strength index, you must decide on the time period you want to use. Wilder used a 14-day period, but I use a period of 8 days to trade short cycles of 21 days the period for trading the intermediate cycle.
To calculate the RSI using Excel, you do the following:
1. Insert the closing price data for your shares in the column "A" in the spreadsheet Excel.
2. calculation of closing prices change by inserting "= A1-A2" in column "B"
3. Isolate growth rates in column "C" by inserting "= IF (B1> 0, B1, 0)"
4. Isolate the fall in prices in the column "D", inserting "= IF (B1 <0, B 1, 0)"
5. calculate the average price upward movement by inserting "= AVERAGE (C1: C8)" in column "E"
6. calculate the average downward price movement by inserting "= AVERAGE (D1: D8)" in column "F"
7. calculating the relative strength (RS), inserting = ABS (E1/F1) in the column «G»
8. calculate the relative strength index (RSI), inserting "= 100-100 / (1 + G1), in column" H "
Note: If you are faced with a # DIV / 0 then you have to use a longer period to avoid dividing the number of "0", otherwise you will have to enter a small constant as 0.00001 to "= AVERAGE (D1: D8) 0.00001 "
Hold and drag the formula down as much as you'd like to go back in time. Now select the column H data and draw or insert a chart using Microsoft Excel. Now you have RSI oscillator, as shown below which you can use to enter and exit your trades.
You must define Trend
Important: If you use an exponential moving average instead of the standard moving average, the eighth of current data plus 7 / 8 from yesterday's data will give you an 8-day exponential moving average. If you are using a standard formula for the exponential moving average, then the formula would equate to a 16 - day exponential moving average.
Before you trade using RSI, you must have the following:
1. You have to define the trend. Only trade using RSI in the direction of your trend.
2. Always use a stop loss which you will keep in the back or updates as the market unfolds.
3. Buy stocks when the RSI falls below 30 level and increases the back of him, but only if your trend is up.
4. Short stock when the RSI rises above 70 level and then falls back below it, but only if your trend is downward
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