Monday, May 11, 2009

What is RSI 2?

Okay, the basic question. What is RSI 2 or 2 day RSI.

To answer that question on needs to know what RSI is. RSI is a technical indicator which is calculated using closing prices of any stock or index for x number of days. Now this x is to be specified by you, the person who is calculating the figures for RSI.

Typically, this x is taken as 14. So RSI is usually calculated using the figures for alst 14 days. RSI 2 therefore, refers to RSI calculated taking just the last two data points.  I was surprised the first time I heard this. How can a RSI calculated for such a small period be of any use?

The answer is, just like RSI is used to determine overbought and oversold levels, so is RSI 2. Its typically used in mechanical or automated trading systems to make profits. We first calculate RSI 2 for historical data. Then we decide a level which we consider overbought or oversold. Typically it would be 90/95/98/99 or 10/5/2/1 for overbought/oversold respectively. So one sells when market is overbought and buys when market is oversold. 

This RSI 2 system is essentially used to capture short term counter trend moves rather than follow any trend following system.

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