RSI is one of the most popular momentum technical indicator among daily as well as short term traders. RSI measures strengths or weakness of stock/market through recent closing price.RSI computes momentum as the ratio of higher closes to lower closes.It ranges between 0 to 100
Most of the technical analysts uses RSI on 14 day time frame. As per their views RSI below 30 is an oversold condition & one should trade long while above 70 its an overbought condition & its time to book profit.
How to use RSI ?
Our study on RSI shows some interesting facts. For better returns on short term trades & creating a portfolio with reducing price one should use RSI on 5 day time frame.He can start taking long position when RSI dips below 20-15 first time and add more when it crosses above 20.He can start booking profits when stock moves and RSI raises near 80 & exit fully when RSI dips below 80 level.However this strategy will work better for regular traders.Look at following charts where we highlighted trades based on 5 day RSI:
On making a rough sheet based on above buy & sell indicators in two heavy weight stocks where normally momentum& returns remains low, but every investor wants them in their portfolio. We started with buy 25 shares on every buy signal & sale 15 shares on every sell signal and holding rest for future portfolio :
In SBI we added total 350 shares on 14 buy signals & costing was Rs.92,250 (average price Rs 263.57) while we booked 165 shares amounting to Rs. 49755 at an average price of 276 & holding rest 140 shares at an average prise of 250 while the current price of SBI is 290.
In ACC we added total 225 shares on 9 buy signals & costing was Rs.331250(average price Rs 1472) while we booked 180 shares amounting to Rs. 253575 at an average price of 1537 & holding rest 60 shares at an average prise of 1293 while the current price of ACC is 1708.
While in RSI 14
In SBI we added just 125 shares on 5 buy signals & costing was Rs.32575 (average price Rs 261) while we booked 90 shares amounting to Rs. 25260 at an average price of 280 & holding rest 35 shares at an average prise of 209 while the current price of SBI is 290.
In ACC we added total 75 shares on 3 buy signals & costing was Rs.103850(average price Rs 1385) while we booked 45 shares amounting to Rs. 67680 at an average price of 1504 & holding rest 30 shares at an average prise of 1205 while the current price of ACC is 1708.
However trading only basis of RSI is never advisable & to get better returns one should add more technical indicator such as candlestick patterns, harmonic patterns and trendlines.
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