What is the best setting for RSI
Relative strength analysis: what the indicator really says
The relative strength analysis shows whether a stock is behaving stronger or weaker compared to the overall market. The associated indicator is called the Relative Strength Index or RSI for short. J. Welles Wilder created it in 1978 and it is one of the most frequently used indicators.
Properties of the RSI
The RSI is an oscillating indicator. That means it swings back and forth between its extreme points. Its values range from 0% to 100%.
The formula for calculating the RSI is: RSI = 100 - (100 / (1 + U / D))
U stands for the average value of the closing prices with rising prices. D stands for the mean value for falling prices. Both are calculated over the same fixed period of time. However, opinions differ as to which value is the best. Relative strength: Good stocks are easy to find
Attitude is a matter of taste
Each indicator can be configured manually. You decide for yourself, among other things, over which period averages are calculated. It's the same with RSI. Its developer Welles Wilder took 14 days as the value. This value is still often used today.
Although 14 is stored as the default setting for the RSI in many programs, other numbers are often recommended. The chart should decide whether you would prefer a number between 6 and 9 to be correct or choose 25. A pre-formed opinion of the trader is a hindrance. It is much more important which value is most meaningful for the respective chart.
The same applies here (as with other indicators) that there is no model solution for a setting that fits all charts and all time levels. The daily chart and the setting for 14 days are certainly a good start in many cases. However, you will often enough find that other values are also meaningful.
Trading the RSI
Trading systems are also gladly linked to the RSI. The values 30 and 70 are considered to be distinctive between the extreme points. If the indicator reaches the value 70, the value of the chart is considered to be overbought. Under 30, it is called oversold. A trend reversal is to be expected sooner or later.
If the value has rotated many times in the past at an RSI of 30 or 70, this can certainly be used for trading. However, it is no guarantee that a trend will end.
If the RSI is at 70 or above, a trend can still go on for some time. Likewise, prices can continue to fall even though the RSI is already showing values below 30.
The 50 is a value that is almost always right. If the RSI is in the golden mean, this is a signal for a stagnating market. No trend is then in sight.
Relative strength analysis
The relative strength index can show whether a value is overbought or oversold. Countermovements in the near future are then likely, but the RSI cannot predict the exact point in time for this. You can also adjust the signal marks depending on the market phase. In a longer upward trend, the brands are pulled up by 10 points each.
This means that the value is only overbought from 80 RSI points and then oversold from 40 points. Conversely, in a downtrend, the brands drop by 10 points each. This adjustment prevents you from investing too early in a countermovement and leaves a trend a little more leeway.
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