RSI is relative strength index it is a technical indicator to display momentum in marke. It measures the magnitude of recent price changes to analyze overbought or oversold conditions.
Now when we talk about only technical analysis in market we are not considering fundamental of the company for which we are investing in stocks. Only thing we consider is how investors demand on the stock based upon price change over a period.
To understand this suppose a stock of a company 'A' gets up move in certain period and gets down move over some other period. We take upmoves period and down moves period to calculate RSI.
First we need to find relative strength(RS).
Relative strength is ratio of mean of upmoves to mean of down moves.
RS= Average Gain During Up Periods /Average Loss During Down Periods
Period is decided as per convinient generally it is 14 as two weeks period.
or in short we can write:
RS= Umean/Dmean
where Umean= Mean of up moves
Dmean= Mean of down moves
The formula for RSI which is index for relative strength:
RSI = 100 – [100/ ( 1 + (RS ))]
ROLE OF RSI IN INVESTING
Now we learned what is RSI. Role of RSI in investing is to know overbought and oversold conditions meaning we can invest in a stock which are at oversold and exit from the stock which are overbought.
This is what Warren buffet said: "To be fearful when others are greedy and to be greedy only when others are fearful."
We will take RSI period as 2 over monthly candles.
For this overbought is 80 and oversold is 20:
Let us look at chart in candlechart:
- MONTHLY_RSI.JPG (72.66 KiB) Viewed 7305 times
For long term investor, investment to be done when RSI touching below 20.
We know diversification is best way to survive against stockmarket risk. Better way to diversify is by inesting in Index mutual funds or ETFs.
ETFs are better considering cost and it is just like stocks which can be bought in market hours. Among this Nifty50 etf is NiftyBees.
So when RSI reaching below 80 invest in lumpsum in Niftybees.This will be a very good asset builder for investor.
Thanks & Regards
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