The RSI indicator uses the closing prices of completed trading periods to determine who owns the momentum in the market. It assumes that prices close higher in strong market periods (bull markets), and lower in weaker periods (bears owning the scene) and computes this as a ratio of the number of higher closes to the lower closes during a certain period of time, most commonly used is the period of 14 days.

Most stock charts packages out there today include the RSI indicator. Here is how it is calculated manually.

RSI = (100 – (100 / (1 + RS)))

Seems simple enough, but the RS part need to be calculated first.

RS = 14-day EMA of upday closing gains / 14-day EMA of downday closing losses

EMA stands for Exponential Moving Average and is used to smooth out an average of a series of values. So what we want to do here is to take a 14 day exponential moving average of the upticks days and downtick days respectively. This is typically done by taking the latest 100 tradingdays, going through them and finding out which ones of the where updays and downdays respectively, and then calculate the moving average using 14 days as parameter. Note! To calculate EMA, see this article. It’s quite easy.

Applying the RS in the first RSI formula, will give you a value between 0 and 100.

The real challenge with Relative Strength Index is to know what boundaries apply for when a market is overbought and oversold respectively. This is the real trick and usually only comes to you after having studied a market thoroughly. Then, and only then, do you know where it usually turns and can thereby learn to recognize when a new turn is coming.

Common rule of thumb levels for RSI are 20 for oversold and 80 for overbought, but that is just as a rule of thumb and will inevitably vary between markets and stocks.

Here is how to calculate it manually which also adds to the understanding on how it works.

In this example we shall calculate EMA for a the price of a stock. We want a 22 day EMA which is a common enough time frame for a long EMA.

The formula for calculating EMA is as follows:

EMA = Price(t) * k + EMA(y) * (1 – k)

t = today, y = yesterday, N = number of days in EMA, k = 2/(N+1)

Use the following steps to calculate a 22 day EMA:

1) Start by calculating k for the given timeframe. 2 / (22 + 1) = 0,0869

2) Add the closing prices for the first 22 days together and divide them by 22.

3) You’re now ready to start getting the first EMA day by taking the following day’s (day 23) closing price multiplied by k, then multiply the previous day’s moving average by (1-k) and add the two.

4) Do step 3 over and over for each day that follows to get the full range of EMA.

This can of course be put into Excel or some other spreadsheet software to make the process of calculating EMA semi-automatic.

To give you an algorithmic view on how this can be accomplished, see below.

public float CalculateEMA(float todaysPrice, float numberOfDays, float EMAYesterday){
float k = 2 / (numberOfDays + 1);
return todaysPrice * k + EMAYesterday * (1 – k);
}

This method would typically be called from a loop through your data, looking something like this:

foreach (DailyRecord sdr in DataRecords){
//call the EMA calculation
ema = Formulas.EMA(sdr.Close, numberOfDays, yesterdayEMA);

//put the calculated ema in an array
m_emaSeries.Items.Add(sdr.TradingDate, ema);

//make sure yesterdayEMA gets filled with the EMA we used this time around
yesterdayEMA = ema;
}

Note that this is psuedo code. You would typically need to send the yesterday CLOSE value as yesterdayEMA until the yesterdayEMA is calculated from today’s EMA. That’s happening only after the loop has run more days than the number of days you have calculated your EMA for.

For a 22 day EMA, it’s only on the 23 time in the loop and thereafter that the yesterdayEMA = ema is valid. This is no big deal, since you will need data from at least 100 trading days for a 22 day EMA to be valid.

The MetaStock software for technical analysis brings more than 10 years of experience of building charting software for traders. With support for building your own system for trading, the scanning system called MetaStock Explorer, and Expert Advisor to help you interpret the trading signals you get, it’s comprehensive enough to cover the basic needs of a beginning trader.

MetaStock comes with over 150 indicators together with the possibility to build custom indicators for technical analysis. It allows for extensive back testing of your own trading systems with its MetaStock Enhanced System Tester.

MetaStock support technical analysis for trader’s in stocks, futures, and forex trading.

MetaStock Review and Opinions

The Good MetaStock adds built in trading signal support and decent explanations for traders who are just starting out trading. The back testing using MetaStock Enhanced System Tester is very easy. It’s quite simple adding your own indicators or tweaking the existing technical analysis indicators. Although we didn’t try it for forex, it should be working for both forex, stocks, and futures, just as promised.

The not so good Compared to many other back testing capable charting software out there, MetaStock falls a bit short in speed and in displaying the results of your back tested trading systems. The UI still lacks trader savvy in our opinion, and it could have even better built in support for traders who want to use a quote source online.

The bottom line MetaStock has been around for a long time for a reason. Any trader, whether it’s forex or stocks or derivative trading should be able to benefit from it. If you want extensive back testing of your own developed trading systems, or portfolio testing you might want to look elsewhere.

No matter what charting software you choose, we wish you good luck on your trading. Feel free to contact us if you have any opinions on this MetaStock review or want to write your own reviews.

Most private savings strategies can be said to be buy-and-hold strategies.

The term is mostly used in combination with trying out trading systems using some kind of technical analysis software.

The oppositoe of buy-and-hold is short term based trading such as swing-, momentum-, or contrarian trading, all part of day or near day trading strategies.

Exponential Moving average is together with its simple counterpart (MA) considered to be one of the most common Indicators in nearly any technical analysis software available in the market today. It’s a trend following indicator and is calculated like so:

EMA = Price(t) * k + EMA(y) * (1 – k)

t = today, y = yesterday, N = number of days in EMA, k = 2/(N+1)

For a complete walkthrough of how to calculate an EMA, see our EMA-walkthrough.

Exponential Moving Average is a trend following indicator.

Shorting is defined as an activity where one person borrows a certain number of stocks, sells them, and after a while buys them back to keep the difference in the price gotten when selling them and buying them back. Confusing? Here’s an example procedure for shorting stocks.

Shorting Example

1) Joe believes the market is about to take a down turn. He belives Goldman Sachs (GS) will drop in price and therefor borrows 1,000 shares from his online broker.

2) Joe immediately sells the stocks that he borrowed for $100 / share.

3) Joe receives the money – $100,000 minus commission.

4) One week later (doesn’t have to be a week, it can be 5 minutes or 10 weeks even) GS has dropped to $90 / share and Joe buys 1,000 shares of GS paying $90,000 + commission.

5) Joe gives back the GS shares he just bought to his online broker that lent him the stocks to begin with.

6) Joe have made a $10,000 – commission for two deals in profit from GS dropping from $100 to $90 per share. He also need to deduct a cost for borrowing the share to his broker.

So, the above procedure outlines what shorting stocks is all about; making money from a price reduction in a stock or index. However, the keywords to take note of here, before going out to your broker and wanting to short stocks are high risk and hidden costs. Let’s examine the costs on the transactions taking place in our example above.

In the example, Joe needs to pay commission twice and also need to pay interest rate for the borrowed stocks. So, more realistically, a profit for about $9,000 in total is more like it. So, in order to make any real money from shorting stocks, you need to have a good amount of money to begin with, to not get eaten by interest rates and commissions.

Alternatives to Shorting

We’ve concluded that shorting is risky business. If the market turns against you when in a short position, you get hit in more than one way since the interst rate on the borrowed stock is ticking away.

So what’s a regular joe to do?

Well, instead of trying to trade like a proffessional, you can take the safer track going with Exchange Traded Funds so called ETF’s that have gained hugely in populraity of late. There are ETF’s for both bulls and bears and with various leverage fitting your risk profile.

Now you should know what shorting means and how to go about it should you want to try it. Be careful though, shorting is very risky.

A buying signal is gotten from MACD when the MACD line crosses the 9-day trigger EMA. In turn, a sell signal is gotten from the reverse. It’s however always important to remember that an indicator showing good entries rarely shows good exits. If you find MACD to give you good entries, then you can almost be certain that you can find other indicators to help you find the best exits.

As stated above, MACD measures the difference between two EMAs. A positive MACD means that the 12-day EMA is above the 26-day EMA. If MACD is positive and rising, then the gap between the 12-day EMA and the 26-day EMA is increasing. This is considered bullish as the rate-of-change of the faster moving average is higher than the rate-of-change for the slower moving average.

Constructing a MACD is really quite simple, as soon as you know how to calculate moving averages.

For any given stock or underlying security:

1. Calculate a 12 day EMA of closing prices

2. Calculate a 26 day EMA of closing prices

3. Subtract the longer EMA in (2) from the shorter EMA in (1)

4. Calculate a 9 day EMA of the MACD line gotten in (3)

That’s it. You now have a MACD line (gotten from the subtraction in 3) and a 9-day EMA of the MACD line. In the image below, the MACD line is the thick black line, and the 9-day EMA of it is the red line.

When plotting the MACD, it usually comes with a histogram as well, as can be seen in the image.

This is gotten from subtracting the 9-day EMA line from the MACD-line. The slope of the MACD histogram shows what crowd is growing stronger. A rise in the histogram above zero shows bulls getting stronger, and vice versa.

When to Use MACD

MACD lines follow trends, so any time of trending sees very good results from using MACD as opposed to very choppy trending times, when it will likely cause for erroneous entry calls. It is especially good for determining when to enter a market.

How To Use MACD

As already stated, the crossovers of the MACD and the MACD 9-day EMA marks entries and exits. However, it’s also important to watch the histogram closely. When the histogram is in negative territory, but have turned upwards, it is usually good to keep an extra for possible early entries. Likewise, if the histogram plots a high bar above the rest, it shows how strong the bulls are and even if a minor decline is imminent it is probably not time to sell, since this has marked a very strong bullish sentiment for the underlying security.