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Prashant Shah: Jun 20th 2020, 21 Tweets, 5 Min Read
Prashant Shah: Jun 20th 2020, 21 Tweets, 5 Min Read
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Prashant Shah
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1 of 10 03/07/20, 15:36
Thread by @Prashantshah267: Thread on Relative Strength Index or R... https://threadreaderapp.com/thread/1274221823081639936.html
We can define bullish and bearish price on a closing basis (Line chart) chart as follows:
Now that we have defined what is bullish and bearish, it is important to find out how much bullish and bearish.
2 of 10 03/07/20, 15:36
Thread by @Prashantshah267: Thread on Relative Strength Index or R... https://threadreaderapp.com/thread/1274221823081639936.html
So, now we know price trend and the amount of gain or loss.
Below is a chart connecting 10 closing prices. Let us calculate gains and losses on this chart.
Let us calculate the simple average price of the gains & losses:
It just means, over the last 10 days, average gains were 14 points and average losses 14 points.
These are absolute points. How to know how strong the bulls are?
3 of 10 03/07/20, 15:36
Thread by @Prashantshah267: Thread on Relative Strength Index or R... https://threadreaderapp.com/thread/1274221823081639936.html
Imagine there are 10 people from Green and Red teams are sitting in a hall.
In the earlier chart example – the average of losing bars plus the average of winning bars was 14+14 = 28.
Average gain was 14. So, RSI will be ((14/28) x 100) = 50%
So, when RSI is at 50, it means Average gain is equal to Average loss.
If total points are 30 and average gain is 18, the RSI would be at 60.
Got it?
14-day is a recommended parameter by Wilder and you will find it as a default parameter in most of the software.
Like ADX, Wilder used his averaging method to calculate average in RSI indicator.
It needs very strong trend without significant correction for indicator to move below 10 or above 90.
Wilder’s method of averaging is slow compared to other methods of averaging such as SMA, EMA, WMA etc.
Remember, when you plot a14-period RSI – it shows the strength of average gains over last 14 bars.
So, there is a virtual box of last 14 bars on price. If there is a strong bullish or bearish close during the 14 days – it
can dominate the RSI reading.
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4 of 10 03/07/20, 15:36
Thread by @Prashantshah267: Thread on Relative Strength Index or R... https://threadreaderapp.com/thread/1274221823081639936.html
5 of 10 03/07/20, 15:36
Thread by @Prashantshah267: Thread on Relative Strength Index or R... https://threadreaderapp.com/thread/1274221823081639936.html
Do this exercise, remove RSI from the chart. Focus on the price action of last 14 bars – try to guess the RSI
number.
RSI is 18 at end of Blue box. Price makes new low in Orange box but RSI remains at 18. Why?
There were some gains recorded on a few sessions in that Orange box that did not let the RSI fall rapidly.
When price makes new low, but RSI doesn’t, it is known as a bullish divergence. It means there were gains in
between while price made new lows but the gains prevented the RSI from making a corresponding lower low. The
logic is reversed for the Bearish divergence.
Clear?
If RSI is at 70, average gains are 70% of total gains and losses. If RSI is at 20, average gains are 20% of total gains
and losses over selected period.
Average of RSI is known as signal line. It helps in smoothing the RSI data. Default parameter is 9 period.
70-30 overbought – oversold levels? RSI above 50 on multiple timeframes? Trading crossovers or trend lines on
RSI etc. Social media and online content is flooded with ideas & trading strategies using this indicator. But
understand what the indicator captures.
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6 of 10 03/07/20, 15:36
Thread by @Prashantshah267: Thread on Relative Strength Index or R... https://threadreaderapp.com/thread/1274221823081639936.html
Observe the number of bullish and bearish lines in below boxes. Price continued to move up but RSI remained
around same zone.
Why?
There is more to talk about method of averaging. There is one indicator which is on similar lines and very
interesting. I will write about that in the next thread.
<End of Thread>
7 of 10 03/07/20, 15:36
Thread by @Prashantshah267: Thread on Relative Strength Index or R... https://threadreaderapp.com/thread/1274221823081639936.html
8 of 10 03/07/20, 15:36
Thread by @Prashantshah267: Thread on Relative Strength Index or R... https://threadreaderapp.com/thread/1274221823081639936.html
9 of 10 03/07/20, 15:36
Thread by @Prashantshah267: Thread on Relative Strength Index or R... https://threadreaderapp.com/thread/1274221823081639936.html
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10 of 10 03/07/20, 15:36