Wells Wilder’s RSI (I Chart)
Understanding Wells Wilder’s RSI Trading Indicator for Optimized Trading
We understand that in the complex world of trading stocks, ETFs, and mutual funds, having the right tools is essential for managing risks. The RSI, or Relative Strength Index, developed by Wells Wilder is one such crucial tool. Let’s dive into its essence and explore how to maximize its benefits for your trading endeavors.
Wells Wilder’s RSI Overview
- What is it? RSI stands for Relative Strength Index. It’s a momentum indicator that gauges the speed and change of price movements. At FT Cloud and FastTrack, we prefer not to use the term “Relative Strength Index” to circumvent any confusion with our very own Relative Strength, R Chart.
- Why is RSI essential for you? It’s like having an early-warning system. RSI can potentially detect tops and bottoms, possibly signaling price direction shifts before they happen. It’s not perfect – sometimes, it might signal too early, but it’s rarely late. This foresight could be a game-changer in your trading strategy.
- How to harness RSI effectively? Pair it up! Use RSI in conjunction with trend lines to pinpoint potential surge or stall moments in specific sectors, like technology mutual funds. Do remember, like all trading-range indicators, RSI can occasionally give early signals, especially in trending markets. So, always validate RSI indications using trend lines and other trend-following indicators.
Interpreting RSI: A Simple Guide
Consider the RSI Chart for Exxon Mobil (XOM). The basic principle is:
- Buy Signal: When the RSI (depicted in yellow) ventures into the oversold zone (below the bottom dotted line) and subsequently crosses above this zone.
- Sell Signal: When RSI breaches the overbought territory (above the top dotted line) and then starts declining past the center line.
Pairing with FT Cloud’s J Chart
By integrating RSI with FT Cloud’s J Chart, you can visually understand the implications of trading between the red and green lines based on the RSI signals. Specifically:
- When the RSI line descends below the 30 value, a buy signal is activated. The J Chart then reflects the returns of the red line.
- Conversely, when the RSI surges past the 70 value, the J Chart illustrates a shift from the red line to selling and transitioning to the green symbol.
This approach is particularly handy for reaping benefits during phases when there’s no long-term trend. Purchases are made promptly from oversold levels, while sales are held off until the downtrend kickstarts.
Please note, the above is a mere example, and RSI interpretation can vary. Often, traders employ RSI alongside other trend-following indicators for robust decision-making.
How RSI is Calculated
Step 1: Initial RSI Calculation
- Calculate the Simple Average of Positive changes and the Simple Average of Negative changes for P days.
- AvgDwn = Sum of Positive changes / P
- AvgUp = Sum of Negative changes / P
- Compute the initial RSI using these Simple Averages.
- Initial RSI = 100 – [ 100 / ( 1 + ( AvgUp / AvgDwn ) ) ]
Step 2: Calculation for Days Beyond P
- For AvgUp and AvgDwn, use an Exponential Average.
- AvgUp = [(Previous AvgUp * (P-1)) + Today’s Negative Change] / P
- AvgDwn = [(Previous AvgDwn * (P-1)) + Today’s Positive Change] / P
Step 3: Calculation for Days Less than P
- RSI = 100 – [ 100 / ( 1 + (AvgUp / AvgDwn) ) ]
Special Note: At FastTrack and FT Cloud, any RSI value below 1 is set to 1. This is exclusive to our platform and doesn’t affect your chart interpretation.
We hope this enriched understanding of the RSI indicator empowers your trading strategies. Always remember, while tools and indicators are valuable, it’s the strategy and foresight that determine success. Safe trading!