Definition of 'Relative Strength Index' - The Economic Times

4. The figure is further normalised using the above formula so as to ensure that it lies between 0 and 100. For computing the next RSI, the ... Nifty17,287.05311.7AdaniWilmarLtd.379.8033.55MiraeAssetHybridEquityFundDirect-Growth14.43% InvestNowMiraeAssetEquitySavingsFundDirect-Growth13.4% InvestNowMarketWatchSearch+HomeETPrimeMarketsNewsIndustryRISEPoliticsWealthMFTechJobsOpinionNRIPanacheETNOWMoreBusinessNews›Definitions› Equity ›RelativeStrengthIndexCategoriesGlossaryEconomyEquityInsuranceBudgetMarketingMutualFundSpaceTechnologyTestingHumanResourceFinanceSecurityRealEstateCommoditySportsSoftwareDevelopmentAnalyticsEntertainmentHRTransportationAstronomyShippingMathematicsRetailEducationSuggestanewDefinitionProposeddefinitionswillbeconsideredforinclusionintheEconomictimes.comEquityPREVDEFINITIONRecordDateTheissuingcompanyfixesaparticulardatewhentheinvestormustownsharesinordertobeeligibletoparticipateincorporateevents.Thisiscalledrecorddate.ReadMoreNEXTDEFINITIONRequiredRateofreturn Definition:RequiredRateofreturnistheminimumacceptablereturnoninvestmentsoughtbyindividualsorcompaniesconsideringaninvestmentopportunity. Description:Investorsacrosstheworldusetherequiredrateofreturntocalculatetheminimumreturntheywouldacceptonaninvestment,aftertakingintoconsiderationallavailableoptions.Whencalculatingtherequiredrateofreturn,investorslookatoverallmarketreturns,risk-freerateofreturn,volatilityofthestockandoverallprojectcost.Therequiredrateofreturndrivesthetypeofinvestmentsthatcanbemade.Forinstance,someonerequiringahigherrateofreturnwouldnecessarilyhavetolookatriskierinvestments.Financeprofessionalsroutinelycalculatetherequiredrateofreturnforpurchasingnewequipment,newproductrolloutsandpotentialmergers.Forexample:aninvestorwhocanearn10percenteveryyearbyinvestinginUSBonds,wouldsetarequiredrateofreturnof12percentforariskierinvestmentbeforeconsideringit. FormulaforRequiredRateofReturnRequiredRateofReturn=RiskFreeRate+RiskCo-efficient(ExpectedReturn-Riskfreereturn) ReadMoreDefinitionof'RelativeStrengthIndex'DEFINITION:RelativeStrengthIndex(acronymRSI)isoneofthemostextensivelyusedmomentumoscillatorsintherealmoftechnicalanalysisofstocks.ItwasintroducedbyWellesWilderinJune1978anditscomputationisexplainedindetailinhisbookNewConceptsinTechnicalTradingSystem.Momentumoscillatormeasuresthevelocityandmagnitudeofpricemovementsofasecurity.RSIcomparesthemagnitudeofaveragegainsandaveragelossesofasecurityfordrawinginferencesaboutitsstrengthandweaknessoverapredeterminedtimeperiod. DESCRIPTION:RelativeStrengthiscomputedusingtheformula RSI=100–(100/1+RS) RS(RelativeStrength)=AverageofXdaysupcloses/AverageofXdaysdowncloses Wilderusedthe14dayRSI,whichisstillthemostcommonlyusedRSI.However,ananalystisfreetodecidethenumberofdaysforcomputingthesame. Forexample,duringa14-daytradingperiodassumethatasecurityhasgeneratedpositivereturnson9daysandnegativereturnson5days.Inthiscase,theRelativeStrengthIndexiscalculatedasfollows 1.Calculatetheabsolutegainineachofthe9updays.Addtheabsolutegainofeachdayanddivideby14.Thiswillgivethefigureofaverageupcloses. 2.Calculatetheabsolutelossineachofthe5days.Addtheabsolutelossofeachdayanddivideby14.Thiswillgivethefigureofaveragedowncloses. 3.DividingtheaverageupclosesorgainsbytheaveragedownclosesorlossesgivesustheRelativeStrength. 4.Thefigureisfurthernormalisedusingtheaboveformulasoastoensurethatitliesbetween0and100. ForcomputingthenextRSI,thefollowingstepsarefollowed 1.Forcalculatingthenextaveragegains,multiplythepreviousaveragegainsby13andaddtoday’sgainsifanyanddividetheresultby14.Inourpreviousexample,wewillmultiplytheaverageabsolutegainsof9daysandaddtoday’sabsolutegain(ifany)anddividetheresultby14. 2.Forcalculatingthenextaveragelosses,multiplythepreviousaveragelossesby13andaddtoday’slossifanyanddividetheresultby14.Inourexample,wewillmultiplytheaverageabsolutelossesof5daysandaddtoday’sabsoluteloss(ifany)anddivideby14. 3.ThenextstepinvolvesdividingtheaveragegainsbytheaveragelossesforgettingthefigureofRelativeStrength. 4.Finally,theRSIisfoundusingtheformulaRSI=100–(100/1+RS) ThefollowinginferencescanbedrawnfromRelativeStrengthIndex 1.OverboughtandOversoldlevels:RSIgivesanindicationoftheimpendingreversalsorreactioninpriceofasecurity.RSImovesintherangeof0and100.SoanRSIof0meansthatthestockpricehasfalleninallofthe14tradingdays.Similarly,anRSIof100meansthatthestockpricehasriseninallofthe14tradingdays.Intechnicalanalysis,anRSIofabove70isconsideredanoverboughtareawhileanRSIoflessthan30isconsideredasanoversoldarea.RSIcanbeusedasaleadingindicatorasitnormallytopsandbottomsaheadofthemarket,therebyindicatinganimminentcorrectioninthepriceofasecurity.Itispertinenttonotethatthelevelsof70and30needstobeadjustedaccordingtotheinherentvolatilityofthesecurityinquestion. 2.FailureSwings:Thisisalsocalledsupportandresistancepenetrationsorbreakouts.Failureswingsareindicationsofimpendingmarketreversals. Bearishfailureswing Inthischart,theRSItouchesthe70mark,thethresholdofoverboughtzonethenfallsto60.Thisiscalledthefailpoint.Postthat,itmovesagainbutriseslessthantheprevioushighof70,thereby,creatingafailureswing.Itthenfallsbelowthefailpointtherecreatingabearishfailureswing.Itactsasasignalforthetradertogoforashortpositioninthesecurity. Bullishfailureswing Inthischart,theRSItouchesthe30mark,thethresholdofoversoldzoneandthenrisesto40,thefailpoint.Itthenfallsagainbutthefallislowerthanthepreviousvalueof30.Moreover,theRSIcrossesthefailpointtoriseevenhighertherebycreatingabullishfailureswing.Itactsasasignalforatradertogoforalongpositioninthesecurity. 1.Divergence:DivergenceresultswhenthepriceofasecurityandtheRSIbehavedifferently.IfthesecuritypriceisdecreasingorflatbutRSIisincreasing,it’sasignofdivergence.Similarly,whenthesecuritypriceisincreasingorflatbyRSIisfalling,it’sasignofdivergence.Itisastrongindicationofanimminentmarketcorrection. 2.SupportandResistance:Insomesituations,theRSIexhibitssupportandresistancelevelswithmoreclaritythanthesecuritypriceitself. The14-dayRSIofstockpricesofReliancePowerinNSE.Theoverboughtlevelsetatover70andoversoldlevelsetatbelow30. Source:http://economictimes.indiatimes.com/markets/technical-charts AccordingtoWilder,theRSIusedtogetherwithbarchartcanprovidepivotalinputstoananalystfordrawinginferencesfromachart. PREVDEFINITIONRecordDateTheissuingcompanyfixesaparticulardatewhentheinvestormustownsharesinordertobeeligibletoparticipateincorporateevents.Thisiscalledrecorddate.ReadMoreNEXTDEFINITIONRequiredRateofreturn Definition:RequiredRateofreturnistheminimumacceptablereturnoninvestmentsoughtbyindividualsorcompaniesconsideringaninvestmentopportunity. Description:Investorsacrosstheworldusetherequiredrateofreturntocalculatetheminimumreturntheywouldacceptonaninvestment,aftertakingintoconsiderationallavailableoptions.Whencalculatingtherequiredrateofreturn,investorslookatoverallmarketreturns,risk-freerateofreturn,volatilityofthestockandoverallprojectcost.Therequiredrateofreturndrivesthetypeofinvestmentsthatcanbemade.Forinstance,someonerequiringahigherrateofreturnwouldnecessarilyhavetolookatriskierinvestments.Financeprofessionalsroutinelycalculatetherequiredrateofreturnforpurchasingnewequipment,newproductrolloutsandpotentialmergers.Forexample:aninvestorwhocanearn10percenteveryyearbyinvestinginUSBonds,wouldsetarequiredrateofreturnof12percentforariskierinvestmentbeforeconsideringit. FormulaforRequiredRateofReturnRequiredRateofReturn=RiskFreeRate+RiskCo-efficient(ExpectedReturn-Riskfreereturn) ReadMoreMovingAverageConvergenceDivergenceMovingaverageconvergencedivergence,orMACD,isoneofthemostpopulartoolsormomentumindicatorsusedintechnicalanalysis.ThiswasdevelopedbyGeraldAppeltowardstheendof1970s.Thisindicatorisusedtounderstandthemomentumanditsdirectionalstrengthbycalculatingthedifferencebetweentwotimeperiodintervals,whichareacollectionofhistoricaltimeseries.InMACD,‘movManagementBuyOut(mbo)Managementbuyout(MBO)isatypeofacquisitionwhereagroupledbypeopleinthecurrentmanagementofacompanybuyoutmajorityofthesharesfromexistingshareholdersandtakecontrolofthecompany. Forexample,companyABCisalistedentitywherethemanagementhasa25percentholdingwhiletheremainingportionisfloatedamongpublicshareholders.InthecaseofanMBO,thecurrenBullishTrend:A'trend'infinancialmarketscanbedefinedasadirectioninwhichthemarketmoves.'BullishTrend'isanupwardtrendinthepricesofanindustry'sstocksortheoverallriseinbroadmarketindices,characterizedbyhighinvestorconfidence. Description:Abullishtrendforacertainperiodoftimeindicatesrecoveryofaneconomy. AlsoSee:BearishTrend,SquaringOff,Long,InflatStopLossStop-losscanbedefinedasanadvanceordertosellanassetwhenitreachesaparticularpricepoint.Itisusedtolimitlossorgaininatrade.Theconceptcanbeusedforshort-termaswellaslong-termtrading.Thisisanautomaticorderthataninvestorplaceswiththebroker/agentbypayingacertainamountofbrokerage.Stop-lossisalsoknownas‘stoporder’or‘stop-marketorder’.BypReturnOnEquityTheReturnOnEquityratioessentiallymeasurestherateofreturnthattheownersofcommonstockofacompanyreceiveontheirshareholdings.Returnonequitysignifieshowgoodthecompanyisingeneratingreturnsontheinvestmentitreceivedfromitsshareholders. Description:Mathematically,ReturnonEquity=NetIncomeorProfits/Shareholder’sEquity. ThedenominatorisessentiallytDeadCatBounce‘DeadCatBounce’isamarketjargonforasituationwhereasecurity(readstock)oranindexexperiencesashort-livedburstofupwardmovementinalargelydownwardtrend.Itisatemporaryrallyinthepriceofasecurityoranindexafteramajorcorrectionordownwardtrend. Description:Thetermisborrowedfromaphrase,whichsays“evenadeadcatwillbounceifdroppedfromaheight.”IronButterflyOptionTheIronButterflyOptionstrategy,alsocalledIronfly,isacombinationoffourdifferentkindsofoptioncontracts,whichtogethermakeonebullCallspreadandbearPutspread. Togetherthesespreadsmakearangetoearnsomeprofitwithlimitedloss.Ironflybelongstothe‘wingspread’optionsstrategygroup,whichisdefinedasalimitedriskstrategywithpotentialtoearnlimitedprofitHedgeFundHedgefundisaprivateinvestmentpartnershipandfundspoolthatusesvariedandcomplexproprietarystrategiesandinvestsortradesincomplexproducts,includinglistedandunlistedderivatives. Putsimply,ahedgefundisapoolofmoneythattakesbothshortandlongpositions,buysandsellsequities,initiatesarbitrage,andtradesbonds,currencies,convertiblesecurities,commoditiesSecuritiesBasedLendingSecurity-basedlendingisthepracticeofraisingaloanbyofferingyourexistinginvestmentsinstocks/mutualfunds/ETFsascollaterals.Theloancanthenbeusedformakingpurchaseslikerealestateorpersonalitemslikecars.Theonlythingthatthisloancannotbeusedforismakingfurthersecuritypurchasesorusingthesamefordepositingofmargin. Description:InordertoraisecashLotSizeLotsizereferstothequantityofanitemorderedfordeliveryonaspecificdateormanufacturedinasingleproductionrun.Inotherwords,lotsizebasicallyreferstothetotalquantityofaproductorderedformanufacturing.Infinancialmarkets,lotsizeisameasureorquantityincrementsuitabletoorprécisedbythepartywhichisofferingtobuyorsellit.AsimpleexampleoflotsizeTrendingDefinitionsDebtfundsReporateMutualfundGrossdomesticproductDataminingAdvertisingProductMonopolyCryptographyDepreciation597000Phool.cobringsgreenbacktoHoli;founderAnkitAgarwaltellswhyAliaBhattinvestedinthecompany140000Sensexsurges850pts,Niftytops17,200asFedhikesratealongexpectedlines301000BuyorSell:StockideasbyexpertsforMarch17,202277000Stocksinfocus:OilIndia,SAIL,GodrejIndustriesandmore166000TataDigital'ssuperappNeutobelaunchedaroundApril8thwith'neverseenbefore'rewardsprogramme190000Sensexgains1,040points,Niftyabove16,950;Paytmsurges7%178000Sensexrises800pts,Niftynears16,900;bank,autostocksgain233000BuyorSell:StockideasbyexpertsforMarch16,202291000Stocksinfocus:IndiGo,ShyamMetalics,ZomatoandmoreMailthisDefinition