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RSI (Relative Strength Index)
The RSI indicator I use as part of the decision process to open or close a position. Divergence signals between price and RSI are a trade confirmation when other buy or sell signals are present. On the other hand, an overbought or oversold RSI can help to hold on to the position when selling signals appear, that way avoiding unnecessary closing of the position.
I use a standard RSI with a dynamic reference level.
The Relative Strength Index (RSI) is a popular momentum oscillator. Momentum refers to the speed of change; oscillator means that the value of the RSI moves (oscillates) between two values (0 and 100). The RSI was introduced by J. Welles Wilder in New Concepts in Technical Trading Systems.
The term “relative strength” might sound a little confusing because it does not compare the relative strength between stocks; rather, it compares the actual price with past prices.
For the application and estimation of price evolution I primarily look at divergences between the RSI and the price bars.
The Formula
RSI basic formulaMeaning:
U = Averaged sum of the prices when the closing price was higher (compared to the previous bar) in the period used.
D = Averaged sum of the prices when the closing price was lower (compared to the previous bar) in the period used.
Within the time period used, RSI measures the relation between the price bars with a higher closing price compared to the previous bar, and between the bars with a lower closing price compared to the previous price bar.
Originally, Wilder used a 14-day period on daily charts; this remains the standard and most widely used value today.
The RSI is a leading indicator.
Tops and bottoms will be visible in the RSI before they show on the price chart.
see more detail -http://stocata.org/ta_en/indicators.html
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