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How to use Relative Strength Index for Stock Market Analysis?

There are a number of things that a person needs to learn when he enters in the stock market. One of the most important things that you might need for analysis is Relative Strength Index (RSI). It is going to help you a lot in the analysis of stock market. It is obvious when you need to buy or sell in the stock market then a professional will always go for it. If you are new in this field then you need to know first that what actually RSI is? Relative Strength Index is considered as one of the most popular indicators that are computed technically by the direction and speed of the stock’s price. If described in short words then RSI indicator helps in measuring the internal strength of the stock.

 

First Learn To Calculate Relative Strength Index

Yes, this is the most important thing. You first need to learn about the calculation. You need to learn how it is calculated before using it in the analysis of stock market. Mostly the time periods which is used to calculate is 14 days but you can use any other time period also. It is actually a standard time period. Here is the formula is given below

RSI=100-100/ (1+RS)

Here RS=Average gain of up periods during a specific period of time /Average loss of  down periods during the specific time period.

Note: For the calculating the value of first average gain of 14 days which is the specific time frame used in this formula

Average Gain = Sum of all the gains over the time frame of 14 days/14

Average Loss= Sum of all the losses over the time frame of 14 days/14

Know The Tips About Using The RSI Indicator

There are a lot of things that a person keeps on learning during his whole career in a stock market. If you have also adopted it then you need these tips. They are going to help you a lot in the usage of RSI indicator:

  • Suddenly increased price movements in the relative strength index can create the condition of false sell or buy signals. In this case, it is best that it should be used with refinements to its particular application.

 

  • There are some traders who use extreme values of RSI as sell or buy signals. This is done just to avoid false signals which come from RSI. I can be a wise step for you as well.

 

  • The RSI indicator is frequently used in the conjunction with the lines of a trend. This is done because of the trend line support or resist with the support level in the RSI read

 

  • A trader should be careful when he is thinking to make the decision on the basis of RSI. It happens most of the times that a scrip keeps on being supported by a momentum which is strong and based on news or any other fundamental reason.

 

  • If you have heard about when the momentum of the market is weak then you will find more stocks in the zone of oversold. This is done because there was a broad-based selloff.

 

  • If the Relative Strength Index is approaching the mark which is about 70 then you must know that the stock price is also following the same trend. In this case, there are many possibilities that a trend might get reversed from the particular level.

A stock market is a place where you need to use your mind with techniques. These above tips were only a few basics that will help you in the stock market analysis. If you want to earn more then you need to learn and experience these things more in practical life instead of juts reading and grabbing knowledge.

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About Emaad Qureshi