RSI ANALYSIS

Beyond the conventional understanding

Datla KMS Raju ATMA Educational Meeting

 RSI Analysis
Beyond the conventional understanding

Agenda Agenda
RSI Advanced Analysis
A brief overview
Establish trend with RSI
RSI calculation
Detect Buy & Sell Signals with
RSI values behavior RSI
RSI Conventional Calculate Price targets with
understanding RSI
Determine Stop Loss with
RSI
RSI - A Brief Overview
 RSI evolution

WELLS WILDER, 1978 JOHN HYDEN, 2004 ANDREW CARDWELL, 2001

RSI The beginning
1978 - Mr. Wells Wilder introduced
the RSI
Mr. Wilder provided step-by-step
instructions on calculating &
interpreting the RSI, in his classic
book, NEW CONCEPTS IN
TECHNICAL TRADING
 RSI The calculation
Initial RSI
RSI = 100 [100 / (1+RS)] 1. Obtain sum of UP closes for
previous N days and divide the
sum by N = Av UP closes
RS = Average of N days 2. Obtain Av DOWN closes
3. Divide 1 by 2 above = RS
closes up / Average 4. Add 1 to RS in 3 above
of 5. Divide result in 4 above into 100
N days closes down 6. Subtract result in step 5 from
100 = first RSI
 RSI calculation - example
DAILY UP DOWN
SL NO PRICE CHANGE TOTAL TOTAL
STEP 3 - RS = 3.00 / 1.60 = 1.875
1 21.00 STEP 4 - 1 + 1.875 = 2.875
2 22.00 1.00 STEP 5 - 100 / 2.875 = 34.78
3 23.00 1.00
STEP 6 - 100 34.78 = 65.22
4 22.50 0.50
5 22.70 0.20
6 22.30 0.40 RSI = 65. 22
7 22.80 0.50
8 23.10 0.30 RSI = 100 100/ (1+RS)
9 23.00 0.10
10 22.40 0.60 3.00 1.60
AVERAGE 0.33 0.18
 RSI subsequent RSI calculation
Initial RSI
1. Obtain sum of UP closes for
previous N days and divide the
sum by N = Av UP closes
2. Obtain Av DOWN closes
3. Divide 1 by 2 above = RS
4. Add 1 to RS in 3 above
5. Divide result in 4 above into 100
6. Subtract result in step 5 from
100 = first RSI
Subsequent RSI
A. Multiply previous Av UP close by N-1
& add to this todays UP close (if
any) and divide the total by N
= next Av UP close
A. Multiply previous Av DOWN
close by N-1& add to this todays
DOWN close (if any) and divide
the total by N
= next Av DOWN close
B. From here on steps 3, 4, 5, & 6
are the same as for Initial RSI.
 RSI behavior
UP DOWN UP DOW UP DOWN UP DOWN
Avg Avg RSI Avg N Avg RSI Avg Avg RSI Avg Avg RSI
1 1 50.00 11 1 91.67 1 1 50.00 1 11 8.33
2 1 66.67 12 1 92.31 1 2 33.33 1 12 7.69
3 1 75.00 13 1 92.86 1 3 25.00 1 13 7.14
4 1 80.00 14 1 93.33 1 4 20.00 1 14 6.67
5 1 83.33 15 1 93.75 1 5 16.67 1 15 6.25
6 1 85.71 16 1 94.12 1 6 14.29 1 16 5.88
7 1 87.50 17 1 94.44 1 7 12.50 1 17 5.56
8 1 88.89 18 1 94.74 1 8 11.11 1 18 5.26
9 1 90.00 19 1 95.00 1 9 10.00 1 19 5.00
10 1 90.91 20 1 95.24 1 10 9.09 1 20 4.76
RSI Conventional Wisdom
 RSI Conventional wisdom
Main RSI Signals
RSI values above 70 or below 30 signal Overbought or
Oversold conditions
Divergence between RSI and price action signals trend
reversals.
Failure Swings, above 70 or below 30 RSI, are strong
indications of market reversals!
RSI Crossing the 50-line up or down, market turns bullish or
bearish
 RSI Trading on conventional rules
Tops & Bottoms
RSI>70 or <30 & their modifications
Does trading based on this principle get us good profits?
 Above 70 and below 30
Is there a trend reversal here?
BAJFINANCE BANKINDIA
 RSI Trading on conventional rules
Divergence
Bullishdivergence price action trends lower & RSI values
trend higher
Bearish divergence - price action trends up & RSI values
trend down
Does trading based on this principle get us good profits?
Where is the bullish Where is the bearish
divergence here? divergence here?
EICHERMOT JUSTDIAL
Divergence trading Profitable?
PFC
 RSI Trading on conventional rules
Failure Swings
Bullish below 30
Bearish above 70

A failure swing only confirms the divergence is real

Failure swings are effectively variations of divergence

Waiting to enter until a failure swing occurs after a divergence

will offer small profits, but can result in larger losses
Failure Swings Profitable?
AMARAJABAT
 RSI Modified indexes
Altman modified RSI popularly called as RMI

Morris modified RSI introduced in 1998, Stocks &

Commodities Magazine, Bonus Issue

Modification of the look-back periods / Smoothed RSI

RSI Advanced Analysis
 Context for RSI Advanced Analysis

Profitable traders possess their own edge

To have an edge, traders must have an accurate
perception of the market that is also unique.
If other traders also have the same perception of the
market, the trading edge disappears.
 RSI Advanced analysis
RSI helps:
Establish trend in given timeframe
Anticipate Trend Reversals

Detect Buy & Sell signals

Calculate price targets

Determine Stop Loss levels

Establish significant Trend lines & Support / Resistance lines

 Understanding RSI Ranges
Wilder specified range 70-30:
In bull markets, market sentiment shifts RSI range upward by
about 10 points 80-40
In down trends, negative sentiment causes RSI range to shift
downward about 10 points 20-60
RSI Trend establishment
EICHERMOT

DOWNTREND

UPTREND

UPTREND
Uptrend RSI mostly above 40 Downtrend RSI mostly below 60

BAJFINANCE - WEEKLY BANKINDIA - WEEKLY

 RSI ranges
Uptrend Roughly 40 to 80
Downtrend roughly 60 to 20
Range shifts:
Shift-Down occurs when RSI fails to rise above 60 in rally,
after a significant correction leading RSI to below 40,
Shift-Up occurs when RSI fails to fall below 40 in a
downtrend, after a significant pullback taking RSI to above
60
RSI Trend establishment
EICHERMOT

DOWNTREND

UPTREND

UPTREND
 A different kind of Divergence
Shifts in values of RSI not directly proportional to changes
in underlying prices
As rate of price increase begins to lose steam in a rally, RSI
value may actually start to decline. & Opposite for
downtrend.
This characteristic of RSI behavior creates some very
unusual RSI chart configurations
Rising prices with rapidly declining RSI values
Falling prices with rapidly rising RSI values
Out of Proportion Shift
BAJFINANCE
 A different kind of Divergence
Points to keep in mind
RSI hitting 80 level does not mean the uptrend is over.
RSI hitting 20 level does not mean the downtrend is over.
How do prices manage to go higher after RSI is propelled to 80 or 90 /
20 or 10 levels
RSI takes a few steps back on hitting its limit as prices barely move.
Each time RSI reverses after taking a few steps back, prices charge to
new highs / lows.
In some cases rapid changes in RSI are clearly OUT OF PROPORTION
with change in price,
 A different kind of Divergence
Interpreting rightly these unusual properties of RSI
opens up new trading opportunities Buy / Sell signals
These unusual RSI configurations are what I call as
OoPS
OoPS, the Out of Proportion Shifts
OoPS Out of Proportion Shifts
A Different type of divergence
PFC

BUY SIGNALS
 Signals & Price targets
Every OoPS signal has 2 points a reference point & a signal
point
For a Buy signal
(1) calculate the price difference between the signal point and its
reference point
(2) add this difference to the high price between the 2 points.
For a Sell signal reverse the process
(1) calculate the price difference between the signal point and its
reference point
(2) subtract this difference from the low price between the 2 points.
OoPS Out of Proportion Shifts
A Different type of divergence
BAJFINANCE
OoPS
JUSTDIAL
 RSI OoPS Guidelines for trading
Look for established trend RSI 40-80 0r 60-20
Once a BUY signal is found, identify & draw an
Ascending Channel on RSI
Once a Sell signal is found, identify & draw a
Descending Channel on RSI
These channels serve as validity lines for the trade.
RSI Channels & OoPS trade - 1
ASIANPAINT
ASIANPAINT
RSI Channels & OoPS, Detailed structure
JUBLFOOD
RSI signals price targets
Stop losses
JUBLFOOD
Stop losses
ASIANPAINT
SUMMARY

RSI conventional wisdom helps but offers limited

opportunities for sustained profits
RSI advanced analysis tools offer better trade
opportunities with
Clear profit objectives
Trade management with well defined Stop Loss points
Clear Risk-Reward parameters
Trend structures etc.
Q&A
 THANK YOU

Datla KMS Raju

Contact details - kmsrajudatla@gmail.com