RSI is calculated purely from the price of the individual stock or market average. RSI essentially compares the price of something to itself. It does NOT compare the relative performance of one stock or market average to that of another. The RSI indicator is most effective when used to spot positive and negative divergences with price. It is also used to determine when a stock or index has reached an overbought or oversold condition within the confines of its primary trend.
This is best determined by using other technical indicators such as price moving averages, Trendlines, and our own Time Segmented Volume TSV. Once the direction of a primary trend has been successfully identified, use RSI to trade strictly with the trend.
For example, if a stock is in a definable uptrend, use RSI to identify optimum entry points. RSI is also capable of positive and negative divergences with price. Wilder suggests using a day RSI although other settings have also proved useful. Where RS is the ratio of the Moving Average of n-Period gains value of up closes divided by the absolute value of the Moving Average of n-Period losses value of down closes.
Please note the Moving Average of n-Period gains is calculated using all of the bars during the Period, not just the up closes non-up closes count as zero. The same is true when calculating losses.
You will also see a check box to "Use Wilder's Smoothing". We've always used Simple Averaging in the calculation of RSI, but Wilder used his own smoothing method a variation of Exponential Averaging , which is available by placing a check in the box. When using Wilder's Smoothing, the Average Period should normally be set to one. If you would like to provide feedback on this topic, please email us at helpfiles worden. Please include the title of the topic in your email.
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