# RSI - Trading Course

## RSI- Relative Strength Index Trading Course

### Highlights

- RSI measures how well a security is performing against itself
- Placing a buy order when the RSI reaches 30 is a sure way to lose money
- Placing a sell order when the RSI reaches 70 is a sure way to lose money
- Key RSI levels are 33.33 and 66.67
- Stay on the right side of the trend and ride impulsive moves with the RSI

## Written Transcript of RSI Trading Course Video

Welcome to the mysmp.com Trading Course on the Relative Strength Index. My name is Al Hill and I will be your instructor for this course.

During this course we are going to cover the following topics with the RSI Indicator: (1) What is the Relative Strength Index, (2) How to Calculate the Relative Strength Index, (3) Overbought.and Oversold Levels, and (4) Riding the Trend Using the RSI.

So, what is the Relative Strength Index. The RSI is one of the most popular technical indicators. The RSI is a basic measure of how well a stock is performing against itself by comparing the strength of the up days versus the down days. This number is computed and has a range between 0 and 100. A reading above 70 is considered bullish, while a reading below 30 is an indication of bearishness. As you can see in the below chart as most charting applications will fill in the background of the RSI as it moves above 70 and below 30.

It is fairly simple to calculate the RSI. Looking at the formula, you will notice that the RSI is calculated by dividing the average positive price change over “x” periods by the average negative price change over “x” periods. While the formula is extremely simple, its power comes from the fact that it measures the strength of a security relative to itself.

Oversold readings on the RSI are considered to be anything below 30. Many traders will use this as an opportunity to add to long positions. Please note, that this is the sure way to lose money. Since the RSI is a measure of the strength of a security, why would someone attempt to purchase a security when it is down on its luck. The only time that a counter strategy would work is in a sideways market, however to trade this type of formation takes enormous experience and discipline. Because even if a trader is right 10 times, it only takes one trending move in the wrong direction to break an account.

Conversely to an oversold level there is an overbought territory for the RSI indicator. This comes into play once the indicator reaches a reading of 70 and above. Most traders will place sell orders once the indicator hits 70. This is a sure way to lose money. Again, extreme readings in the RSI occur for a reason. So, if the security is experiencing a strong move, a trader does not want to go against the primary trend.

Instead of using the RSI for buy and sell signals, a more effective use of the tool is to utilize its ability to forecast the primary trend. While most traders focus on the 30 and 70 level, the most important levels with the RSI indicator is 33.33 and 66.67. These represent internal Fibonacci relationships with the indicator. Going from 50 to 66.67 the average gain and loss ratio remains at 1:1. Once the RSI exceeds 66.67, the ratio increases by 2:1, which means the up average is twice the amount of the down average. Thus implying that the bulls are in control. Going from 50 to 33.33 the average gain and loss ratio remains at 1:1. Once the RSI drops below 33.33, the ratio increases to 1:2, which means the down average is twice the amount of the up average. Thus implying the bears are in control.

Let’s look at real-life example of GE. Notice how once the RSI broke down in mid-2008 the RSI never broke back above 66.67. So, the security never made a move strong enough where the up days where able to have a 2:1 ratio to the down days. Hence all counter rallies where weak and the stock continued lower. So, many traders focus on the 50 line, however as you can see in the GE chart, the 50 line was violated on numerous occasions. But notice how 66.67 held its ground.

The last example we have here is from the 2007 chart of Coca Cola. Notice how once the stock bottomed in early 2007, it experienced a strong move higher and the RSI never broke 33.33 to the downside. Again, the 50 line was violated on numerous occasions but this modified method of monitoring the trend with the RSI held true.

Beyond identifying the 33.33 and 66.67 levels, a trader must first identify a security that is trending strongly. Another method for identifying securities that are trending strongly is whether they are above or below all of their respective moving averages. This also implies that the security is experiencing a strong move in either direction. Once you are able to identify this, look for the hidden RSI levels described in this course to keep you on the right side of the market.

Now, time for additional resources. A great read on the RSI indicator is the RSI – The Complete Guide by John Hayden. This book covers very detailed strategies for trading the RSI and some golden rules for using the indicator.