Thursday, January 10, 2013

Thoughts on the RSI

Rakesh Sethia asks:

"RSI failing to mark higher highs with the price shows that the speed of price rise is slowed down. or is it? the price can move down and thus a valid divergent signal. But if I have to any which ways follow the price, whats the need for an RSI. Its just an indicator of getting cautious.

On second thoughts, if the speed of price rise has slowed down, i.e. momentum has slowed, do I still need to be in the lazy price moving stock or do i exit straightaway? if yes, how long?"


A discussion on the RSI (Relative Strength Index, a technical indicator developed by Welles Wilder in 1978), is useful and interesting.

Rakesh made his remarks following my blog post Indicator Divergences in the Nifty .

When the RSI fails to make higher highs, while price continues to do so, the indication is that momentum has slowed down. Maybe prices were moving up at 3 percent a week, and, now are moving up at 2 percent a week. This suggests deceleration in momentum, which leads to lower highs in the RSI. Now comes the question: So what? If prices are rising at 2 percent a week, does it suggest the onset of a decline? My answer is: certainly not. 

Traders can say that a divergence warns hem to be 'cautious'. How? How do we become cautious? Therefore, a divergence in the RSI does not provide an actionable strategy.  

A decline in the speed of price rise does not suggest that the uptrend is over. In fact, quite the opposite. We must understand that prices are still rising. This happens when the trend is strong, therefore, a divergence will often suggest a strongly trending stock. You want to stay with it. 

6 comments:

raj gujral said...

Dear sir
Please help us to predict rang-bound behavior of market (nifty) and how to deal with it.
I earned lot of money from 7/9/12 to 8/10/2012 & I lost most of the money in the range in the in hope of down rally from 8/10/2012to 9/11/2012.
I used adx to deal with it but failed

Rakesh Shethia said...

to discuss a situation on lower momentum.. suppose I booked profits after I see the range being developed. Now I anticipate a big news on a particular day. I buy both calls and puts expecting a big move. The news is out, however there is no big move as such. Both my calls and puts are in loss. The scrip is still in a range.
My concerns:
(1)How do I deal with this kind of situation.
(2)Why do I want to add a risk of time eating away the value of options (apart from unfavourable/undesirable price movement)?

Dinesh said...

Dear Sir,
RSI oscillates between 0 and 100. If I calculate the RSI value for a stock assuming 14 days period and also keep the gains in the last 14 days equal to the losses in the last 14 days, RSI is equal to 50. Does it tell us that as long as RSI is above 50 and rising, we are in uptrend as far as that stock is concerned?
Regards,
Dinesh

Dinesh Rishi said...

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Anil Jindal said...

Waiting for your new post...

netprofitideas Blog -DK said...

Sudarshan Sir..Thank You For Your Valuable Comment On RSI

RSI -Divergent Should not Be Used Alone As if There Is Strong Trend Then Don't apply Divergence Theory..it will not be profitable

Divergent is not confirmation for trend change Its your money and market has to uncertain So trade with lil Confidence if you have proved theory (you may not be failed 60%) it should be used with other tools,Such like stochastic oscillator.

See The divergent above 50 and around 30 in buying Side
Only Profitable when Reaction High or Reaction Low is Broken.as per given levels