Technical Analysis: Relative Strength Index.Business & Marketing Essay

Technical Analysis: Relative Strength Index  Name Course Date
 Background The Relative Strength Index (RSI) is one of the most reliable technical indicators used in the analysis of financial markets. It was developed by J. Welles Wilder, with the aim of improving the momentum (Ciana, 2013). The RSI also  measures the magnitude of prices rise or fall and ranges between 0 and 100, when inn overbought zone the range between 70 and 100, as an oversold area between 30 and 0 and the levels between 30 and 70 are considered as a neutral zone (Investopedia, 2018). Wilder used 14 periods but if it is intended to operate in the short term the period can be shorter to have a more sensitive RSI. The RSI relative strength measure as it is possible to measure how fast and strong - the price of a value rises or falls relative to its usual prices for a specific time period. The RSI is used to analyze the price movements of Bank of America and Coca-Cola using closing prices of 14 days.RSIThe calculation of RSI is • RSI = 100-100/ 1 + RS• Where RS= Average Gain over specified period/ Average loss over the same periodThe Buy and sell signals occur when the tool indicates that the stock are oversold or overbought and, whether there are extreme values, considering that the more extreme the value of the RSI, the greater the guarantees that the prices will change. This analysis requires the monitoring of the values historically achieved by the RSI. As such, with the Relative Strength Index, analysis focuess on the purchase signal and the sales signal (Wagner & Balog, 2012) The purchase signal occurs in the oversold condition, when the RSI reaches a value lower than 30 and shows that prices have fallen rapidly and there may be a reaction in the opposite direction, which is upwards. Even as the RSI surpasses 30 on the downside, this does not imply that prices will immediately rise, it is a warning that an upward reaction may soon occur, in principle only in the short term (Wagner & Balog, 2012). At other times, they represent a change of upward trend. In the latter case, the best buying opportunities depends on whether indicator reaches an extreme lower value. The sales signal occurs in the overbought condition, when the RSI reaches a value greater than 70; indicating that there has been a  rapid rise in prices and there may be a reaction in the opposite direction, that is, downward. Taking into account that a value of the RSI above 70 does not imply that, immediately, the prices will fall, it is a warning that a downward reaction may occur soon; in principle, mostly in the short-term, but may extend over time would imply a change in the downward trend (Investopedia, 2018). The latter case mostly occurs more usually when the indicator reaches the extreme higher value. Relative Strength Index and Bank of AmericaAssuming a  14-day period from 11th  October 2018 to 31st October 2018 and excluding the weekends, the RSI would be calculated based on price changes in that period.On 11th October   the calculations would be Change= previous stock price- current stock price =28.36-29.24- (0.88)Average gain = Total gain/ number of days2.06/19=0.11Av...