What are RSI Indicators? How to use RSI indicators?
Relative strength index is a stock trading tool which investors use on a periodic basis to pick shares. It exhibits the drive of a stock option in a chart with the drops and climbs placed beside each other. It is quite a noteworthy tool in the share market as it charts an item’s progress and is an indication of whether it is in an ‘oversold’ or ‘overbought’ condition.
It is planned based on the speed and direction of a stock’s price movement. This number does not rely on other factors such as other stocks or market indices. It is a sign of the stock’s price based on its past and this factor completely.
How are the RSI indicators calculated?
RSI can be applied to any time period whether a month or just 14 days. Absolute gains on each day can be calculated. i.e. the difference between the opening stock price and its closing number, and divide the total by the time period you are considering. So if you are looking at the RSI of one stock in the equity market for a 14 day period then you take the total absolute gains and divide it by 14. The same goes for the absolute losses. The ratio that is in between these two values is the relative strength of the stock option.
The values are placed in the below formula to ensure the numeral moves between 0 and 100, it is then placed on a chart.
RSI = 100 – 100 / (1+RS*) * RS = Average gains / Average losses
A stock is considered ‘overbought’ when the RSI reaches 70. This indicates that it might be overvalued and a likely candidate for a pullback where the price is dropped for a brief period. When it hits 30 the asset is being ‘oversold’ and is likely to be undervalued. When trading in the Indian stock market, the RSI is a good tool to use in conjunction with other stock picking methods. It indicates whether the market is right to buy or sell a particular share that is either being undervalued and like to climb (buy) or being oversold and likely to drop (sell).