The Complete Guide to Investing in Commodity Trading and Futures by Mary B. Holihan

Author:Mary B. Holihan
Language: eng
Format: epub
Publisher: Atlantic Publishing
Published: 2014-01-24T00:00:00+00:00

Relative Strength Index (RSI)

Oscillators are a group of indicators that technical traders use to indicate overbought or oversold conditions. The most commonly used oscillator is the relative strength index (RSI), which measures the velocity of a price. The RSI measures the rate of change of the commodity’s price by comparing the average price change of its increases with the average price change of its decreases. RSI is also called the momentum oscillator because it indicates the momentum or speed that a price is rising or falling. It is calculated using the average gain of the days the commodity closes higher divided by the average gain of the days the commodity closes lower. Technical traders look to the RSI to tell them whether a given commodity is overbought or oversold. The actual formula is RSI = 100 - (100/1 = RS), where RS is the average of net up closing changes (for whatever number of days are being measured) divided by the average of net down closing changes. For example, to calculate the RSI over the past week, you would average the change of the previous seven days and divide this number by the average of the change of the seven days before that. The RSI usually fluctuates between 25 and 75 when there is pressure, it may move under 25 or over 75; under 25 would mean that a commodity is becoming oversold, and demand will push the price up and over 75 would mean that it is becoming overbought, and supply will push the price down. One of the dangers of using the RSI as an indicator is that in very volatile markets, it can remain oversold or overbought for long periods of time. Because of this, it is difficult to trade using RSI numbers alone, but the RSI is a very good indictor of upcoming reversal points. Once the RSI price starts moving in one direction or the other, be prepared to buy if the RSI starts heading into an oversold range, or sell if it indicates that the market is overbought, as long as the other indictors you are using support this.

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