Relative Strength Comparison - Fidelity (2024)

FAQs

What is the formula for relative strength comparison? ›

The Relative Strength Comparison indicator is calculated by dividing one security's price by a second security's price (the "base" security). The result of this division is the ratio, or relationship, between the two securities.

Traditional interpretation and usage of the RSI are that values of 70 or above indicate that a security is becoming overbought or overvalued and may be primed for a trend reversal or corrective pullback in price. An RSI reading of 30 or below indicates an oversold or undervalued condition.

The basic rule of thumb is that an RSI value over 70 indicates a stock is “overbought” and may see its price fall in the future. Meanwhile, an RSI value of 30 or lower can mean that the price could go up. An RSI of 50 is often seen as neutral, meaning the stock has not been either overbought or oversold.

A RS indicator is calculated by dividing the price of the numerator stock by the price of the denominator stock over the chosen look-back period, rather than dividing the price of the denominator stock by the price of the numerator stock.

The strategy uses a 5 period simple moving average (SMA) to determine trend and a 5 period relative strength index (RSI) to confirm signals. It outlines the rules for buying - when price closes above the 5 SMA and RSI is above 50, and selling - when price closes below the 5 SMA and RSI is below 50.

Best RSI Settings for Day Trading

The default setting for RSI is usually a 14-period calculation. But in day trading, where things move fast, adjusting the settings can be beneficial. A shorter period like a 9 or 10 might offer more responsive signals, suitable for the quick decisions required in intraday trading.

One technical indicator that can be used in conjunction with the RSI and helps confirm the validity of RSI indications is another widely-used momentum indicator, the moving average convergence divergence (MACD).

Investors using RSI generally stick to a couple of simple rules. First, low RSI levels, typically below 30 (red line), indicate oversold conditions—generating a potential buy signal. Conversely, high RSI levels, typically above 70 (green line), indicate overbought conditions—generating a potential sell signal.

What is the average relative strength? ›

The basic idea behind the RSI is to measure how quickly traders are bidding the price of the security up or down. The RSI plots this result on a scale of 0 to 100. Readings below 30 generally indicate that the stock is oversold, while readings above 70 indicate that it is overbought.

The difference between relative strength and RSI is essentially a difference of perspective. The relative strength tells about the value of a stock in comparison to another stock, index or benchmark, while the RSI tells about the performance of a stock in comparison to the recent performance of the same stock.

When trading with RSI, traders also watch out for overbought and oversold signals. While the default RSI setting is 14-periods, day traders may choose lower periods of between 6 and 9, so that more overbought and oversold signals are generated. Ideally, these levels should correspond with support and resistance levels.

Relative Strength Index (RSI): The Relative Strength Index is the average of the number of upward price movements in a period divided by the average of the number of downward price movements.

An RSI above 70 suggests a security may be overbought and could be a good candidate for a bearish trade. Likewise, an RSI below 30 suggests a security is oversold and could be a candidate for a bullish trade.

Relative strength compares an individual's lifting capacity to their body weight. It is calculated by dividing the amount of weight lifted by an individual's body weight. For example, a 70-kilogram person lifting 100-kilograms on a bench can lift 1.42 times their body weight.

The Relative Strength line is calculated by dividing the price of the stock by the price of the index it is being compared to. The resulting ratio is plotted on a chart. The ratio value itself is not a useful metric, but the trend of the line is highly valuable.

By the most simple of definitions, the strength-to-weight ratio of a given material is the strength of the material divided by the mass (also commonly referred to as weight, on planet earth) of the material. To be more exact, specific strength is a material's strength divided by its density.