The Hindu Business Line : Tech Tools

I am unable to calculate the RSI and RSI (average). The formula for RSI with me is: RSI = 100 - (100/1 + RS), RS = High/ Low. Pramod C. Surya Rao

RSI or the relative strength index compares the magnitude of the stock's recent gains to the magnitude of the stock's recent losses and turns that information in to a number that ranges from 0 to 100. A 14-day time period with a 9-day average is recommended for RSI calculations.

Though your formula for calculating the RSI is correct, the formula for calculating the RS is not. The correct formula is as follows:

RSI = 100 - 100/(1 + RS).

Average gain = (Total Gains/n)

Average loss = (Total Losses/n)

RS = (Average Gain/ Average Loss)

The way to compute the RSI would be to first compute the gains or losses made at the end of each trading day for a 14-day period. Divide the total gains by 14 to get the average gains. Next divide the total losses by 14 to get the average loss. Then compute the RS and the RSI. The average gains and average losses can be exponentially smoothed for better results. But space constraints disallow the discussion of that formula this week.

Wilder recommended using 30 and 70 as the oversold and over bought levels. If the RSI moves below the 30 line, it would mean that the stock could reverse any time. Conversely, the RSI moving above 70 is a signal that excessive momentum is being generated and a slow-down is around the corner. Another way to interpret the RSI is to wait for the average line to cut the RSI line from below and to move above it. That is a buy signal. If the average line cuts the RSI from above and moves below it, it is a sell signal.

Divergences are the other factor that technical analysts look out for in the RSI oscillator. Divergence would mean the difference in the trend between the RSI and the underlying stock. For example, if the RSI is moving lower while the stock is making new highs, it would mean that the rally lacks strength. On the other hand, an upward move in the RSI while the underlying stock moves lower is a sign of weakness around the corner.

What is the significance of regression indicator/slope and money flow index analysis in regular technical analysis, while determining the reversals of trends? S. V. Kumthekar

The regression indicator is plotted by taking the end points of successive linear regression lines to make an indicator that is similar to the moving average line. It shows where prices should be trading on a statistical basis on a particular day. The regression indicator is superior to the moving average line as it is not an average but plotted on data points. Regression indicator does not lag the price like the other indicators. The slope of the regression indicator shows the trend in the stock. A reversal in this indicator will indicate a possible trend reversal in future. Excessive deviation from the regression line should warn the investor about a sharp move in price as such deviations get corrected quickly.

The formula for calculating the money flow index is similar to that for calculating RSI. The only difference is that instead of taking the closing price, money flow index uses the product of the average price for a day and the volume. Trend reversal can be predicted in the same manner as it is done for RSI. A 9 day average line can be used to generate buy and sell signals. The indicator moving below 30 or above 70 would also indicate an impending trend reversal.

Lokeshwarri S.K.

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