Using Technical Indicators

Three most commonly used technical indicators are Relative Strength Index(RSI), Slow Stochastic(SSTO) and Moving Average Convergence Divergence(MACD)
  • Relative Strength Index (RSI)
Relative Strength Index was introduced by Welles Wider (Author: New Concepts in Technical Trading)
RSI is a momentum indicator which compares the price of a stock/instrument relative to itself.  Hence the indicator is a measure relative to its past performance.

We typically give a span for the RSI as 14 days.

RSI14days = 100 - [100/(1+ UpDownRatio)]

where:
              UpDownRatio =     Average of 'Close Price' for the Up days in 14 day period 
                                              Average of 'Close Price' for Down days in 14 day period

To calculate "Average of 'Close Price' for the Up days in 14 day period", add the 'Close' price for Up days in the 14 days span and divide by 14.  Do the same with Down days  to get the denominator value.

RSI oscillates between absolute values 0 to 100, though these extremes are rarely achieved.
It is less volatile than ROC indicator. 

Using the 14 days span for the indicator, the Overbought Level is set as 70 and Oversold level as 30
You can consider going long when the RSI hits the bottom below OVERSOLD level. Similarly, you can take profit or go short when the RSI hits the top above the OVERBOUGHT level.

And since the moentum action turns ahead of the price action, RSI serves as an early warning of the impending price move.

RSI is one of the few indicators which produces reliable classical chart patters like Head and Shoulder, Pennants and Triangles. The indicator gives the support and resistance level  - i.e, you can draw the support and resistance levels in the RSI chart and will help to predict the Price action.

Divergence is one of the useful functions of RSI (Divergence between the Price Action and RSI indicator movements)
When price and momentum are moving in the same direction, they are said to be in-sync. Sometimes, the price action and momentum may be out of sync. There can be cases where the Price rallies to a new high, but the momentum indicator (say RSI) makes a downward trend (lower highs). This is a case of negative divergence and can be used for profit taking or short sell. Similarly, when RSI is at the bottom, the price action can head to a lower level while the RSI indicator can show upward trend ("higher lows"). This is the case of positive divergence. 
Positive and Negative divergences are very reliable signals and one should not miss the opportunity to trade.

Refer the Market Outlook section for RSI indicator

  • SSTO
Will be updated soon
  • MACD
Will be updated soon



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