Investors who want to learn stock market investing often turn to technical analysis for objective and unbiased guidance as to when they should enter or exit a particular position. Some events are simpler to determine than others, especially for people who are just starting to learn stock techniques. The Relative Strength Index (RSI) of a security would be medium-difficult.

What Is Relative Strength (RSI) An oscillator, RSI measures a security's relative strength compared to its own price history. What this does for the investor is provide insight into overbought and oversold conditions and can also help identify support and resistance levels better than the price chart itself can.

How Relative Strength Works Unlike some of the other oscillators covered in our technical analysis series, the RSI is plotted on a scale of 0 to 100. The key levels to remember are 0 to 30 for oversold, 30 to 70 for in range, and 70 to 100 for overbought. Depending on the investor's strategy, these numbers can have different trading implications.

Figuring out the RSI In terms of mathematics, maintaining an ongoing RSI chart is more involved than some other technical analysis calculations. To figure out a security's RSI, we use this formula: 100 - [100/(1 + A)] where A consists of the average andquot;upandquot; days divided by the average andquot;downandquot; days over a predetermined time frame. For example, if a stock closes up 7 days and down 7 days of the past 14 days, then the RSI would be 50.

Trading the RSI Unlike other indicators, the RSI does not simply provide black-and-white buy or sell recommendations. Instead the RSI can provided a number of key pieces of information. First the RSI is often better than the underlying security's price chart at demonstrating key support and resistance levels. Second, the RSI will show whether a security is overbought (level between 70 and 100) or oversold (between 0 and 30). These bearish and bullish signals can help investors determine whether to exit an existing position or open a new one, either on the long end or the short end. Relying on the RSI to confirm a prospective trade is really the entire point of using technical analysis in the first place.

Trading software can alleviate a lot of the time consuming and draining calculations needs to produce a solid buy or sell signal. Although technical analysis involves many aspects and signals, such software can change an individual investor's experience from overwhelmed to simple... or at least make it simpler.

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Article Submitted By: ChrisBlanchet
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