In this blog Global Market Astro has tried to explain its readers a few important technical indicators used by the traders to forecast the market movements.
Relative Strength Index (RSI)
Relative Strength Index is a primary technical momentum indicator which compares the magnitude of recent gains to recent losses in an effort to conclude overbought and oversold situations of an asset.
RSI Formula:
RSI = 100 – 100/ (1 + RS*)
RSI = 100 – 100/ (1 + RS*)
Where RS = Average of x days’ up closes / Average of x days’ down closes.
In this chart, the RSI ranges from 0 to 100. A financial asset is considered to be overbought once the RSI reaches the 70 level, meaning that it may be getting overvalued and is a good sign for a pullback. Likewise, if the RSI reaches the 30 mark, it is a signal that the asset may be getting oversold and hence likely to become undervalued.
Overbought
A financial asset that has gone through sharp upward movements over a very short period of time is considered to be overbought. Technicians use indicators such as the relative strength index, stochastic oscillator or money flow index to identify securities that are becoming overbought. It is a situation in which the demand for a particular asset excessively pushes the price of an underlying asset to levels that do not support the fundamentals. Overbought stocks may always experience a pullback.
Oversold
Assets that have experienced sharp downward movements over a short period of time are often deemed to be oversold. It is a condition in which the price of an underlying asset has dropped down sharply, and to a level below which its true value. This condition is usually a consequence of market overreaction or panic selling.A condition in technical analysis where the price of an asset has dropped to such a degree – usually on high volume – that an oscillator has reached a lower bound. This is usually understood as a sign that the price of the asset is becoming undervalued and may represent a buying opportunity for investors.Oversold is the contrary of overbought.
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