How read from a composite RSI?

Question

Horace · Accepted Answer

A composite RSI is an indicator that combines multiple RSI (Relative Strength Index) calculations or components, often to smooth out noise or provide a more comprehensive view of momentum. To interpret a composite RSI, you need to understand the individual RSI components and how they are combined. Generally, values above 70 suggest overbought conditions, while values below 30 suggest oversold conditions. However, the specific interpretation can vary based on the composite RSI's construction and the trading strategy it's used with. Here's a breakdown of how to interpret a composite RSI:1. Understand the Components:Individual RSI:The composite RSI is built upon one or more standard RSI calculations. A standard RSI measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a security. Additional Components:Composite RSIs may incorporate other elements like:UpDown Length: Measures the length of consecutive up or down days. Rate-of-Change: Calculates the percentage change in price over a specified period. Moving Averages: Smooths out the RSI values with moving averages. 2. Identify Overbought/Oversold Levels:Standard RSI Interpretation:A standard RSI above 70 typically indicates overbought conditions, suggesting a potential price pullback. An RSI below 30 suggests oversold conditions and a possible price rebound. Composite RSI Adjustments:The specific overbought and oversold levels for a composite RSI might differ from the standard 70/30 levels. These levels are often determined by the composite RSI's construction and the desired trading strategy. 3. Look for Divergences:Divergence:A divergence occurs when the price of an asset moves in one direction, while the RSI moves in the opposite direction. For example, if the price is making higher highs, but the composite RSI is making lower highs, it could indicate a potential bearish reversal.Divergence with Composite RSI:Composite RSIs can help identify divergences that might be missed by a standard RSI, providing more reliable signals. 4. Consider the Trading Context:Trending Markets:In a strong uptrend, a composite RSI might stay above 70 for extended periods, and a pullback below 70 might be a buying opportunity. Conversely, in a strong downtrend, the RSI might stay below 30, and a move above 30 could signal a potential short-term rally.Range-Bound Markets:In a range-bound market, the composite RSI can help identify potential overbought and oversold levels within the trading range. 5. Use with Other Indicators:Confirmation: Composite RSIs are often used in conjunction with other technical indicators and chart patterns to confirm trading signals. Examples of Composite RSI:Connors RSI (CRSI): Combines RSI, UpDown Length, and Rate-of-Change. Constance Brown RSI: Includes a Composite Index that confirms momentum shifts. CMB Composite Index: Uses smoothed momentum indicators based on RSI.

Adam · Answer

How the RSI WorksAs a momentum indicator, the relative strength index (RSI) compares a security's strength on days when prices go up to its strength on days when prices go down. Relating the result of this comparison to price action can give traders an idea of how a security may perform.2 The RSI, especially when used in conjunction with other technical indicators, can help traders make better-informed trading decisions.3Calculating RSIThe RSI uses a two-part calculation that starts with the following formula:2RSIstep one=100−[1001+Average gainAverage loss]RSIstep one​=100−[1+Average lossAverage gain​100​]The average gain or loss used in this calculation is the average percentage gain or loss during a look-back period. The formula uses a positive value for the average loss. Periods with price losses are counted as zero in the calculations of average gain. Periods with price increases are counted as zero in the calculations of average loss.The standard number of periods used to calculate the initial RSI value is 14.4 For example, imagine the market closed higher seven out of the past 14 days with an initial average gain of 1%. The remaining seven days all closed lower with an initial average loss of −0.8%.The first calculation for the RSI would look like the following expanded calculation:55.55=100−[1001+(1%14)(0.8%14)]55.55=100−⎣⎢⎡​1+(140.8%​)(141%​)​100​⎦⎥⎤​Once there are 14 periods of data available, the second calculation can be done. Its purpose is to smooth the results so that the RSI only nears 100 or zero in a strongly trending market.RSIstep two=100−[1001+(Previous Average Gain×13) + Current Gain((Previous Average Loss×13) + Current Loss)]RSIstep two​=100−[1+((Previous Average Loss×13) + Current Loss)(Previous Average Gain×13) + Current Gain​100​]Plotting RSIAfter the RSI is calculated, the RSI indicator can be plotted, usually beneath an asset’s price chart, as shown below. The RSI will rise as the number and size of up days increase. It will fall as the number and size of down days increase.TradingViewAs you can see in the above chart, the RSI indicator can stay in the overbought region for extended periods while the stock is in an uptrend. The indicator may also remain in oversold territory for a long time when the stock is in a downtrend. This can be confusing for new analysts, but learning to use the indicator within the context of the prevailing trend will clarify these issues.

How read from a composite RSI?

2 Answers

2 Answers

How read from a composite RSI?

2 Answers

2 Answers

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