The Relative Strength Index (RSI) should not be confused with Relative Strength.
The Relative Strength Index (RSI) is a technical indicator used in the technical analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period. The indicator should not be confused with relative strength.
The Relative Strength is a measure of price trend that indicates how a stock is performing relative to other stocks in its industry. It is calculated dividing the price performance of a stock by the price performance of an appropriate index for the same time period. (Definition by Investopedia)
Stock2own.com automatically selects an appropriate index to compare with from 3 major indexes depends on a stock’s country of trade:
- US and Canada: S&P 500 Index
- Asia: Nikkei 225
- Europe: FTSE 100 Index
Calculation
There are many different methods exist to measure relative strength of a stock. In general it is calculated dividing the price performance of a stock by the price performance of an appropriate index for the same time period.
At stock2own.com we calculate the difference between RSI of a stock and RSI of an appropriate index. In the “Relative Strength” section of the stock chart you may see 3 charts: stock RSI, index RSI and Relative Strength of a stock versus Relative Strength of an index.
How to use it
The level of the RSI is a measure of the stock’s recent trading strength. Traditionally, RSI readings greater than the 70 level are considered to be in overbought territory, and RSI readings lower than the 30 level are considered to be in oversold territory. That is why 30 and 70 levels are highlighted on the chart. In between the 30 and 70 level is considered neutral, with the 50 level a sign of no trend.
You can see RSI charts for both – your stock and corresponding index. RSI for a stock gives you an understanding of the stock trend, while RSI for an index shows you current trend for the market as a whole.
The third chart – Relative Strength of a stock versus index – shows how good a stock performs comparing to the market. If this line is around level 50 – stock is doing pretty much the same as the market as a whole. If this line is below 50, than stock is not doing well; if this line is above 50, stock is doing better than a market. Please, keep in mind that even when stock is doing better than market, its price still may go down. It is just going down slower than for majority of other stocks.
Tags: Relative Strength, RS, RSI, Stock Charts, technical analysis
March 25, 2011 at 10:54 am |
you guys are doing a great job, you have the best rule #1 application out there. keep up the good work!
July 18, 2011 at 5:14 pm |
How much technical analysis is too much? – I have heard it said that price and volume action coupled with a few other indicators are all you need – do you agree – then if so which indicators used in conjunction are the best?
July 19, 2011 at 2:27 pm |
There are a bunch of different strategies and every one requires its own instruments. On top of that, you may find that in certain market conditions one strategy may be more profitable than another… So, there is no really a limit to the number of indicators you may use. I guess, only personal experience will help you to filter those instruments that works the best FOR YOU.
I know that Stan Weinstein was talking a lot about trading volume in his book “Secrets For Profiting in Bull and Bear Markets”. He uses mostly volume along with 30 week moving average (the same as 150 day moving average). There are a lot of examples and quizzes that build only on those two indicators. Very good book. You may find it on amazon, if you want to read:
July 19, 2011 at 3:02 pm |
Thanks for your response Alex. I have already read Stan’s book. It is not as well known as some of the “big” stock market books but it is in my view one of the best – I love his quote that “it is all in the tape” – I’m going to bookmark your page and take a look at the other stuff
thanks again
D