Skillsfirst Level 5 Diploma in Financial Trading (RQF) - Module 4 - Technical Analysis
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Skillsfirst Level 5 Diploma in Financial Trading (RQF) - Module 6 - Risk and Money Management
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J. Welles Wilder Jr. developed the RSI, a popular oscillator that gauges the market’s trend of strength or weakness.

RSI quantifies price momentum, and it depends solely on the changes in closing prices. Despite its name, it has nothing in common with the traditional relative strength concept, whereby the price of a stock is divided by a broad market index (such as Standard & Poor’s 500 Index) to arrive at a ratio that shows the trend of a stock’s performance relative to the general market.

Instead, the RSI is actually a front-weighted price velocity ratio for only one item (a stock futures contract, or an index).

Here are the steps to calculate RSI:

  • Calculate the difference between current Closing price and previous Closing price (DIFFt = Closet – Closet-1)
  • Calculate the up and down averages, using the DIFF values from the previous step. For Up Averages use: o Ut = (UP1+ … +UPn)/n
  • For Down Averages, use: o Dt = (Down1+ …+Downn)/n
  • Calculate RSI using this formula: RSIt = [Ut/(Ut+Dt)]*100

RSI is said to indicate an “overbought” condition when it is above 70 (CQG/Windows default is set at 75.00) and an “oversold” condition below 30 (default set at 25.00). Also, RSI momentum divergences are frequently accurate for indicating that a market turning point is imminent.

  1. An RSI above 70 indicates an overbought condition, while and RSI below 30 indicates and oversold condition.
  2. It is displayed as a moving average line.
  3. RSI is based on days up vs. days down and is arithmetically derived. Look for divergence between RSI and the market trend.

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