Relative Strength Index (RSI)
There are literally dozens and dozens of indicators that are classified as momentum indicators. Probably the most popular indicator in this classification is the MACD indicator. The RSI is probably the second most common. The basic difference between the two is that the MACD is based upon the difference between two specific moving averages while the RSI is based upon a ratio of the average upside moves versus the average downside moves during a defined period. As you might have guessed, I prefer the RSI for my work.
By its construction the RSI moves up and down within the range from zero to 100 with the 50 level as the neutral level. The MACD has no upper or lower limits, although it does have a neutral zero level, and varies from stock to stock, Index to Index.
By changing the time period over which the RSI is calculated one can obtain momentum information that is more appropriate for such time period. One would not produce an indicator based upon its actions over a short period (say 9 days or 14 days) if one were interested in understanding the momentum trend for intermediate or long term investing.
For the time period under consideration, if the RSI is moving upwards then the upside moves are improving versus the downside moves. The opposite is true if the RSI is moving downward. So what does it mean if the RSI is moving sideways?
If the RSI is moving sideways then the average up days during the period and the average of down days is consistent. If the average of up days during the period is equal to the average of down days, the RSI will be at 50. If the average of up days is greater than the average of down days, and such ratio between the two stays consistent, then the RSI will be constant at a level greater than 50. If the average of up days is less than the average of down days, and such ratio between the two stays consistent, then the RSI will be constant at a level less than 50. This is why one could see the Index either going down or up at a basically constant rate but the indicator is moving sideways.
There are a lot of ways to use or interpret the RSI but the above is basically the meat of the indicator.
There are literally dozens and dozens of indicators that are classified as momentum indicators. Probably the most popular indicator in this classification is the MACD indicator. The RSI is probably the second most common. The basic difference between the two is that the MACD is based upon the difference between two specific moving averages while the RSI is based upon a ratio of the average upside moves versus the average downside moves during a defined period. As you might have guessed, I prefer the RSI for my work.
By its construction the RSI moves up and down within the range from zero to 100 with the 50 level as the neutral level. The MACD has no upper or lower limits, although it does have a neutral zero level, and varies from stock to stock, Index to Index.
By changing the time period over which the RSI is calculated one can obtain momentum information that is more appropriate for such time period. One would not produce an indicator based upon its actions over a short period (say 9 days or 14 days) if one were interested in understanding the momentum trend for intermediate or long term investing.
For the time period under consideration, if the RSI is moving upwards then the upside moves are improving versus the downside moves. The opposite is true if the RSI is moving downward. So what does it mean if the RSI is moving sideways?
If the RSI is moving sideways then the average up days during the period and the average of down days is consistent. If the average of up days during the period is equal to the average of down days, the RSI will be at 50. If the average of up days is greater than the average of down days, and such ratio between the two stays consistent, then the RSI will be constant at a level greater than 50. If the average of up days is less than the average of down days, and such ratio between the two stays consistent, then the RSI will be constant at a level less than 50. This is why one could see the Index either going down or up at a basically constant rate but the indicator is moving sideways.
There are a lot of ways to use or interpret the RSI but the above is basically the meat of the indicator.
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