Indicators: RSI, A/D and Divergence Analysis

INDICATORS Ing. Radovan Dráb, PhD. Ing. Viliam Vajda, PhD. RSI – RELATIVE STRENGHT INDEX RSI (Relative Strength Index) Creator of the RSI - Welles Wilder (1978) RSI is momentum indicator – oscillator The principle of this indicator is to find out situation on the market where the...

INDICATORS Ing. Radovan Dráb, PhD. Ing. Viliam Vajda, PhD. RSI – RELATIVE STRENGHT INDEX RSI (Relative Strength Index) Creator of the RSI - Welles Wilder (1978) RSI is momentum indicator – oscillator The principle of this indicator is to find out situation on the market where the stock is too expensive (for trader) or too cheap (for the trader). This means that traders are looking for overbought and oversold moments. The default parameter for this indicator is 14, together with usual parameters 9 and 25 periods Calculation: 100 RSI 100  1  RS RS – average of raw Close up prices (CLOSE price is higher than previous price) / average of raw Close down prices (CLOSE price is lower than previous price) RSI – Calculation example Example: Period with parameter 14 1. Trader have to note down Close prices for 14 periods. 2. Trader have to watch how many Close prices, of the last 14 periods (bars), were higher than previous ones - to sum up all differences (Close UP prices) and divided this number by number of periods (in our example parameter 14) - (H) 3. Trader have to watch how many Close prices, of the last 14 periods (bars), were lower than previous ones - to sum up all differences (Close Down prices) and divided this number by number of periods (in our example parameter 14) - (H) 4. Calculate RS - RS = H/L 100 5. Calculate RSI according to formula RSI 100  1  RS RSI – usage Oscillator around neutral line 50 Zone oscillator - zone/range (0 – 100) Important lines: 30 points and 70 points (alternative 20 – 80) Values above 70 points – the market is overbought Values below 30 points – the market is oversold 1. If the indicator is above 70 points line and there is a cross downward – signal for entering sell position 2. If the indicator is below 30 points line and there is a cross upward – signal for entering buy position 3. The traders should alternatively use neutral line (50 points) RSI – application Overbought zone Oversold zone RSI – Combinations with other indicators RSI – is not good to use on the market with strong trend. It is not good to use combination with: STOCH W%R - The same indicators – the calculation is similar and they are also looking for overbought and oversold zones. - Wilder said, that its good to use some of the trend indicators - To "filter out" fake signals (e.g. ADX) RSI – Failure signals Divergence Divergence 2 RSI – Failure swings RSI – Failure swings 2 Trend identification ACCUMULATION/DISTRIBUTION LINE A/D – Accumulation/Distribution Line Creator– Marco Chaikin The main role of this indicator is to determinate if traders: 1. Accumulate – the market is controlled by buyers 2. Distribute – the market is controlled by sellers Calculation formula A/D= CLV*Volume CLV – Close Location Value CLV= [(Close – Low)-(High-Close)]/(High-Low) A/D – Usage Watching for positive and negative divergences. - Price chart is moving up and A/D moving down – this means (or should means) that traders are finishing accumulation and trend should change his movement soon. - Price chart is moving down and A/D moving up – this means (or should means) that traders are finishing distribution and trend should change his movement soon. We don't enter to the positions according to the A/D indicator.... but according to the other different indicator. TNX 4 ATT