Indicators

There are probably thousands of different Technical Analysis indicators today. A great majority of indicators are in essence a derivative of the price itself and provide a different point of view of the price action.

Three basic and more widely used indicators are discussed in turn.

Relative Strength Index (RSI)

The first is the Relative Strength Index (RSI). The RSI was developed by J. Welles Wilder. RSI is used as an interpretation of the strength of the stock by comparing between the days that the stock finishes up and the days it finishes down.

RSI ranges from 0 to 100. Generally when RSI reaches around 30, it is considered oversold and it indicates a buy signal, where as when RSI reaches around 70 it is considered overbought and it indicates a sell signal. However, this is not a hard and fast rule. In a bullish trend, RSI might extend and persist above 70 and some might suggest 80 is a better indicator. In a bearish trend, RSI might extend and persist below 30 and an adjustment to 20 might be a good idea. The shorter period used to construct RSI would result in a more volatile reading and therefore can potentially lead to more false signals.

Next: Building Blocks of Technical Analysis: Indicators - Bollinger Bands


    Table of Contents
  1. Introduction
  2. Technical Analysis Explained
  3. Building Blocks of Technical Analysis: Charts
  4. Building Blocks of Technical Analysis: Trendlines
  5. Building Blocks of Technical Analysis: Moving Averages
  6. Building Blocks of Technical Analysis: Indicators - RSI
  7. Building Blocks of Technical Analysis: Indicators - Bollinger Bands
  8. Building Blocks of Technical Analysis: Indicators - MACD
  9. Building Blocks of Technical Analysis: Price Patterns - Reversal Patterns
  10. Building Blocks of Technical Analysis: Price Patterns - Continuation Patterns
  11. Conclusion
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