Saturday, January 9, 2010

Technical Analysis Part I

Technical analysis as apoosed to fundamental analysis, includes analyzing charts and technical indicators like RSI, MACD, moving averages, etc.
It has its uses if the trader or investor is aware of its good and bad points.

One weakness is that its interpretations can be affected if you draw the same charts on a different scale, i.e. arithmetic or semi-log scale. Another potential weakness is that the price and volume of a stock can be manipulated so as to give certain patterns or readings for the other traders.

A) RSI (Relative Strength Index)
The number of days can be varied. In our case we choose 9 days instead of the usual 14 days. The RSI can also be calculated on a weekly or monthly basis. The shorter the time, the more sensitive RSI becomes.

The maximum and minimum levels that the RSI indicator can theoretically go to are 100 and 0. Usually if the RSI is above 70, it is overbought and if it is below 30, it is oversold. These are useful for short-term traders.

An important use of RSI is when there is a divergence between the company's price or a market index and its RSI. A "bullish divergence" signals a short-term bottom while a 'bearish divergence" signals a short-term peak.

Introduction to RSI:
This indicator is also very popular with traders in the future markets. Its formula is:

RSI = 100 - ( 100/1+ rs )

Where rs = average of X day's up closes / average of X day's down closes.

1 comment: