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Friday, December 26, 2014

Weekly Investment Term #8

Today, we are going to look at one of the technical indicator commonly used by financial analysts....RELATIVE STRENGTH INDEX (RSI)

Some people feel that technical indicator cannot be used alone while others follow the chart and pattern religiously.

Generally, Relative Strength Index (RSI) is a momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. 

The formula is pretty easy for one to remember:

RSI = 100 - 100/(1+RS*), 

where RS* = average of x days up of shares when market close/ average of x days down of shares when market close

The best way to look at the relative strength index is by plotting a graph....

As you can see, the RSI ranges from 0 to asset is generally deemed to be overbought when the RSI approaches the 70 level (overvalued) while when it dropped to 30, it is viewed as oversold and therefore undervalued.

It is important to take note that large surges and drops in the price of an asset will affect the RSI by creating false buy or sell signals. It is best to used the RSI indicator together with the fundamentals of a company, accompanied by other technical indicators as well....

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