Using Metastock to Analyses RSI
I. General Statement
The
Relative Strength Index
(
RSI
) is a
technical indicator
used in the
technical
analysis
of
financial markets
. It is intended to chart the current and historical
strength or weakness of a stock or market based on the closing prices of a recent
trading period. The indicator should not be confused with
relative strength
.
The RSI is classified as a momentum
oscillator
, measuring the velocity and
magnitude of directional price movements. Momentum is the rate of the rise or fall
in price. The RSI computes momentum as the ratio of higher closes to lower
closes: stocks which have had more or stronger positive changes have a higher RSI
than stocks which have had more or stronger negative changes.
II. Calculation
For each trading period an upward change
U
or downward change
D
is calculated.
Up periods are characterized by the close being higher than the previous close:
U
= close
now
− close
previous
D
= 0
Conversely, a down period is characterized by the close being lower than the
previous period's (note that D is nonetheless a positive number),
U
= 0
D
= close
previous
− close
now
If the last close is the same as the previous, both
U
and
D
are zero. The average
U
and
D
are calculated using an
n
period
exponential moving average
(EMA). The
ratio of these averages is the
Relative Strength
:
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View Full DocumentIf the average of
D
values is zero, then the RSI value is defined as 100.
The Relative Strength is then converted to a Relative Strength Index between 0 and
100:
The exponential moving averages should be appropriately initialized with a simple
average using the first
n
values in the price series.
III. Principles
The level of the RSI is a measure of the stock's recent trading strength. The slope
of the RSI is directly proportional to the velocity of a change in the trend. The
distance traveled by the RSI is proportional to the magnitude of the move.
Wilder believed that tops and bottoms are indicated when RSI goes above 70 or
drops below 30. Traditionally, RSI readings greater than the 70 level are
considered to be in overbought territory, and RSI readings lower than the 30 level
are considered to be in oversold territory. In between the 30 and 70 level is
considered neutral, with the 50 level a sign of no trend.
IV. Rule to choose company that suitable for RSI

Have a long historical data
Taking the prior value plus the current value is a smoothing technique
similar to that used in exponential moving average calculation. This also
means that
RSI
values become more accurate as the calculation period
extends

Stocks have high volatility:
RSI is a indication that shows of the
trends of a stock or commodity or market index. This doesn’t measure
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 Spring '11
 ssgdbfb
 Financial Markets, RSI

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