Trading Expert Knowledge

Reference Knowledge

1. Technical Analysis Indicators Reference

RSI (Relative Strength Index)

Formula: RSI = 100 - (100 / (1 + RS))
Where:  RS = Average Gain / Average Loss over N periods (default N = 14)

Step-by-step calculation:
  1. For each period, compute change = Close(t) - Close(t-1)
  2. Gains = max(change, 0), Losses = abs(min(change, 0))
  3. First average: simple mean of first 14 gains/losses
  4. Subsequent: AvgGain = (PrevAvgGain * 13 + CurrentGain) / 14  (Wilder smoothing)
  5. RS = AvgGain / AvgLoss
  6. RSI = 100 - (100 / (1 + RS))

Worked example (14-period):
  Avg Gain over 14 periods = 1.02
  Avg Loss over 14 periods = 0.68
  RS = 1.02 / 0.68 = 1.50
  RSI = 100 - (100 / (1 + 1.50)) = 100 - 40 = 60.0

Interpretation:

• RSI < 30: Oversold territory (potential buy signal)
• RSI > 70: Overbought territory (potential sell signal)
• RSI = 50: Neutral, price momentum balanced

Advanced RSI Signals:

Signal	Description	Strength
Bearish divergence	Price makes new high, RSI makes lower high	Strong reversal warning
Bullish divergence	Price makes new low, RSI makes higher low	Strong reversal warning
Bullish failure swing	RSI drops below 30, bounces, pulls back above 30, breaks prior RSI high	Very strong buy
Bearish failure swing	RSI rises above 70, drops, bounces below 70, breaks prior RSI low	Very strong sell
Range shift	RSI oscillates 40-80 in uptrend, 20-60 in downtrend	Trend confirmation

Best practices: Never use RSI as a sole signal. Combine with trend direction (moving averages) and volume. In strong trends, RSI can stay overbought/oversold for extended periods.

---

MACD (Moving Average Convergence Divergence)

MACD Line   = EMA(12) - EMA(26)
Signal Line = EMA(9) of MACD Line
Histogram   = MACD Line - Signal Line