E A Deep & Dark Relative Strength Index (RSI) Secret

I’m about to reveal one deep RSI strategy that many pro traders use. It will help you create screeners to pick trending stocks for intraday to medium-term trading.  Before I spill the beans, let’s dig deeper into RSI to understand this momentum indicator is considered so potent.

Understanding RSI (Relative Strength Index)

I’m assuming here that you know that RSI is set to 14 periods by default and that one period can be equal to the time you choose on the charts (one minute to one month).

With that said, check the following image. The three scenarios, A, B, and C, contain the closing price of a stock for 14 periods.

RSI works by

(a) Deducting the previous close from the current close. The difference is plotted as a loss or gain, as the case may be.

(b) Averaging the gains and losses after totaling these up for 14 periods.

(c) In the third step, it averages the gains and losses by dividing these by 14 (the default RSI period setting)

Next, the following formula is applied to the average gains and losses:

RSI = 100 – [100 / (1 + (Average Gain / Average Loss) )]

The RSI that is derived for each of the following scenarios is:

For scenario A, the RSI is 53.49

For scenario B, the RSI is 61

For scenario C, the RSI is 40.62

Take a hard look at these statistics:

In scenario A, the average gains were 115% of the average losses, the price appreciated 1.5% (1000 to 1015), and the RSI was 53.49.

In scenario B, the average gains were 157% of the average losses, the price appreciated 4% (1000 to 1040), and the RSI was 61.

In scenario C, the average losses were 146% of the average gains, the price depreciated 3% (1000 to 970), and the RSI was 40.62.

From the examples above, we can say:

(a) That when RSI is around 53-54, the gains over the last 14 periods are marginal (1.5% price gain and 115% average gain/average loss).

(b) That when RSI is 60+, the gains over the last 14 periods are substantial (4% price gain and 157% average gain/average loss)

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Disclosure: I have no position in the stocks discussed, and neither do I plan to buy/sell it in the next 72 hours. I researched and wrote this article. I am not being compensated for it (other ...

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