1. RSI (Relative Strength Index)
Introduced in 1978 by J. Welles Wilder Jr. in his technical trading publication, the RSI has since become one of the most widely used technical analysis indicators.
It ranges from 0 to 100, with levels below 30 indicating an oversold state and levels above 70 indicating an overbought state. The RSI measures the relative strength of stock prices, helping to forecast potential volatility and directionality.
2. Calculation Method
To calculate the RSI, one first determines the price change for each trading day over a 14-day period. If this price change is positive, it's considered an upward move; if negative, a downward move.
RS= Average Loss/Average Gain
RSI = 100 - (100/1+RS)
For instance, if the average gain over 14 days is 2.33 and the average loss is 1, the RSI is 70.
Conversely, if the average gain is 1 and the average loss is 2.33 over 14 days, the RSI is 30.
3. Application
Simply put, an RSI below 30 indicates an oversold state, and an RSI above 70 indicates an overbought state.
Points of Caution
The RSI measures relative strength, focusing not on the absolute price change but on the relative scale of gains to losses and the sustainability of the trend. This can lead to disparities between the stock price movement's magnitude and the RSI's magnitude.
Distortion of the Indicator
For example, imagine a scenario where a stock price decreases by $1 each day for 14 days. At this juncture, with an average drop of $1, the RSI would be 0. However, if on the 15th day, the price rises by $2, the RSI could approach the overbought territory of 66.7, despite the overall 14-day net decrease of $12.
Sideways Market
In a sideways or consolidating market, due to limited stock price fluctuations, the RSI tends to hover around the mid-range. Abrupt short-term price movements can cause substantial RSI shifts. Thus, in such conditions, it's advisable to await clear signs of a breakout from the consolidation.
Changing Market or Company Structure
Since the RSI gives insights based on historical data, if there's a significant shift in the market environment or company structure, RSI signals might lose some of their predictive power.
In conclusion, while the RSI can provide valuable insights, it's crucial not to rely solely on it. Distortions can occur, and overbought or oversold readings don't always forecast price reversals. It's best to interpret the RSI cautiously and in conjunction with other technical indicators.
댓글