Analysis of Asset Allocation

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Oscillators: RSI (RELATIVE STRENGTH INDEX)
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Computation

The RSI, developed by Welles Wilder is the most known and used indicator of oscillations. To compute it you need:

  1. To add all the gains from one day to the other during the chosen period.
  2. To add the absolute value of all the losses from one day to the other during the chosen period.
  3. To divide the above additions by the number of days chosen.
  4. To divide the gain per day by the losses per day
  5. Bring it back between 0% and 100%

At the step 4, we get what is called the RS.

The formula is:

AU = (sum of gains during the period) / n
AD = (sum of absolute losses during the period) / n

RStn = AU / AD

RSItn = 100 - {100/(1+RStn)}

Interpretation

The RSI is always between 0% and 100%. If the value of the RSI is over 70%, it's considered as a sale signal. If the value of the RSI is below 30%, it's a purchase signal. Between 30% and 70%, it's a neutral zone.

As for the other technical indicators, you have to choose the lag (n). The most often one is 14 days.

Graph Example: RSI

The RSI14 is drawn on the bottom part of the graph. Sale and purchase lines are represented by the dotted lines.

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