hi ya all, BD good to have u back to herd us rabble into some sort of order; nice snaps too.
Did a blog on the use of the RSI indicator which can be found in a new window here RSI study Find that many do not seem to like links so I will C&P most of it below.
RSI study 210112
What is RSI?
Developed J. Welles Wilder, the Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. RSI oscillates between zero and 100. Traditionally, and according to Wilder, RSI is considered overbought when above 70 and oversold when below 30. Signals can also be generated by looking for divergences, failure swings and centerline crossovers & to identify the general trend.
How calculated?
As usual with indicators its not that important to understand the maths; so if you don't care then just skip this section & go to the charts! But personally "I don't use it if I don't understand it!" The formula:
100 RSI = 100 - -------- 1 + RS
RS = Average Gain / Average Loss
In plain english the RSI compares the average gains over a period (the period is usually 14 days; I note Redbacka uses a different period; I have asked a few times why but I gather he does not red my posts? If anyone has a suggestion re different periods I would be interested to hear) to the losses ... so if the gains are "increasing" the theory is that the share/index is gaining momentum and you get a bigger number; that sounds logical doesn't it?
One handy reminder for me is that if you have 14 days of continuous gains the indicator will equal 100; 14 losses the RSI=0 (I have yet to see this on any chart.)
Indicators generally
Like most of the indicators I have had a play with RSI over my TA journey but generally I thought like most I had the opinion that it "worked sometimes" but also believed it was limited to a "oversold" (under 30) and "overbought" (>70) type signal. I realise now that
MY understanding was limited & that even my general thoughts re oversold and overbought were too simple.
I also understand that most of the peop's I follow (and admire greatly) in teh investing world are gnereall "price is king" sorta guys and I always remember 10cents (Tony) saying indicators are for learning and then stroing in teh bottom draw or some such statement.
What got me interested in RSI?
1. After a few years of learning TA and 12 months of dabbling with shorter term trading using cfd's I have finally concluded that shorter term trading is NOT for me (say it 5 times loudly Graeme & do not GO near it .... oh OK maybe occasionally LOL) because:
- I do NOT have the talent of some that I follow over in Twitter land (by the way talent when it comes to trading IMO covers many aspects including market knowledge, TA skills, patience, but by far the biggest is personality type)
- I do not have the time (yes, it really is time consuming to do well)
2. So I have been trying to develop a trading system based on longer term (minimium days but prefs weeks and months) trend following techniques that just catches me a percentage of those big swings.
3. A twitter post by. @gloveski15 (Richard) OMH a classic 60/20 RSI bear market $STUDY had a chart that looked a bit like this:
The signals generated from the RSI looked COMPELLING to my eye!
Some research
Richard suggested reading Taking RSI to the Next Level which can be found here
taking-rsi-next-level
Key learnings for me:
1. The normal range for RSI 30-70 is only good for saying whether oversold and overbought
which are terms that are way to simple & not that helpful in trading IMO.
2. Adjust up the range to 40-80 in bull runs and down to 20-60 in bear runs and you get some interesting definition of "bullish" and bearish. eg if its in an uptrend and it breaks the 40 line the trend has finished and you are now bearish & vice versa: this what this signal looks like with 10 years of Dax:
If you look closely there are way to many signals and they come too late in the "moves" to be
useful; the basic reasons lots of peops (including me) consider indicators & then sort of
dismiss them.
3. Ahh but now it gets interesting what about if we are in an uptrend (bull) and that the swings
within that bull get weaker and that they fail to reach bear indicator line of 60? Is that the early
indicator for the end of the uptrend and as signal to go short?
"In a bull range when RSI has trouble rebounding over 60 after a pullback, the trend is getting
tired and could be ready to reverse."
This is what dax looks like over last year when its been essentially going sideways overall; & yes using this simple indicator in this way returned >90% over the period.
Note: On reflection it would be hard to capture the full amount indicated because you may not be sure that the swings have occurred until a day or 2 after. But even taking 1/2 the amount indicated eg. 46% is a "not bad" return!
Some more charts that caught my eye:
LT XJO forks
Same forks up closer
& XJO with RSI showing entries
& saw GBPUSD on the fib review this morn; loves a fib.
seems to like forks too:
& it is obeying the RSI rules:
CONCLUSION: The RSI is a very powerful indicator that is capable of way more than indication oversold and overbought.
(20min delay)