RSI - Relative Strength Index
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Tom Ventresca MarketEdge.com |
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Wells Wilder's RSI is a good indicator to time entry and exit points.
The Relative Strength Index (RSI) was developed by J. Welles Wilder to detect Overbought and Oversold conditions. The name Relative Strength Index is slightly misleading as the RSI does not compare the 
relative strength of two securities, but rather the internal strength of a single security.
The RSI is comprised of three variables: 1) the average of all up closing prices during a given period; 2) the average of all down closing prices during the same period; and 3) the length of the period in days over which these averages are taken. RSI measures the degree of strength left in a price trend. If price has been declining and RSI drops to 30 or lower, traders should be alerted to a probable reversal of the downtrend, since momentum would appear to be losing its strength. If RSI moves above 70 as price rises, an intermediate top is usually imminent. The time period used by most traders is nine days.
RSI can be a valuable indicator when timing entry and exit points as well as a good trading tool. When approaching the market from the Buy side, open positions when the stock's RSI approaches 30. Conversely, when initiating a short sale, wait until the RSI approaches 70.
The chart of Home Depot (HD) located below is a good example of price action to be expected when the RSI approaches 70 (Sell) and 30 (Buy). Note the price decline that occurred in early May and mid-June as RSI moved over 70. Conversely, HD recorded a significant bottom in early August as RSI approached 30. RSI also provides a trader with an edge as to when to take a short-term profit, wait for a pullback and then reopen the position.
The Relative Strength Index should not be confused with 50-Day Relative Strength or with Relative Strength Value (RSV). 50-Day Relative Strength is a comparison of a stock’s performance over the previous 50 days with that of the S&P 500, while RSV is a measurement of a stock's performance versus a universe of stocks. Market Edge (www.marketedge.com) computes RSI, the 50-Day R-S and RSV for over 4400 stocks on a daily basis. They are included in the Second Opinion report and the various screening modules.
Tom Ventresca has been Computrade’s Director of Research since its inception in 1991. Prior to founding Computrade, Tom spent 12 years in the securities industry holding several positions including broker, sales manager, bond trader and market technician.
1947: Born-Pittsburgh, Pa.
1965-1969: Pennsylvania State University, BA degree.
1970-1978: Builder
1978-1990: Securities industry. Firms included First Southeastern, E.G. Francis, First Southeastern, Smith Barney and Oppenheimer.
1990-Present: Computrade Systems, Inc. Co-founder and Director of Research. Computrade is the developer of Market Edge, a comprehensive, computerized research web site, which is accessed by individuals, brokers and institutions throughout the world. As Director of Research, Tom writes Market Edge’s ‘Market Letter’ and ‘On The Edge’ plus the Dr. Market Edge series. Both the Market Letter and On The Edge provide in-depth market analysis based on three market timing models that he developed. Tom also has recently finished a new book, ‘Trade Like A Pro’ which is a systematic, disciplined approach to the stock market. Based on technical analysis, this book addresses five topics that he believes are critical to having success in the market. These subjects include market timing, stock selection, timing entry and exit points, protecting positions and money management.