As the report stresses the purpose of an RSI is to compare the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. The RSI is best used as a valuable complement to other indices, for in and of itself it is susceptible to the fact that large surges and drops in the price of an asset will affect the RSI by creating false buy or sell signals. Different RSI settings can allow traders to get more accurate market readings about different strategies that they might wish to use. “Swing traders” might want to set the measured period at 15 days, while those buying to hold for longer times might want to make it equal to 30 or even 50 days.
In this analysis the author has made the Bollinger Bands our trade trigger and the RSI our trading confirmation. The two indices must be simultaneously within their respective domains where we desire them for a given buy or sell position, or we ignore the trade signal and hold everything. He has used this strategy so that the “noise” created by volatility indicated by the Bollinger Bands gets reduced by the “high pass filter” of the RSI reading. Simply put, he is looking at once at an individual stock’s performance and at that stock’s industry’s performance. The author has taken an aggressive approach in our analysis. This was a result simply of following the strategy that we had laid out; we were not attempting to be overly aggressive nor overly conservative and we were not tossed to and fro by emotions.