Relative Strength Index - wrong usage causes wrong learning

Cho Sing Kum
29^th Dec 2002

I was on a training assignment to Kuala Lumpur for the week of 16^th December 2002. An article appeared in the Business Section of the New Straits Times (or was it actually The Business Times delivered together) on Tuesday, 17^th December 2002. It was about the Nikkei, the source of which was attributed to a big name information provider. I did a search in Yahoo! and found the paragraph I was looking for here. (The document is longer available at this link. The saved copy is here.) This article was dated Sunday, 15^th December 2002. Scroll down to the 6th paragraph from the bottom and you will find this paragraph:

"The Nikkei has lost eight percent since December 3 and is less than two percent above a 19-year closing low of 8,303 hit on November 14. Its 14-day relative strength index is below the 30 oversold line at 25, suggesting limited downside in the near term."

As I was also teaching the Relative Strength Index that week, this was a good example to show how the market was still being bombarded by wrong teachings on the RSI. Naturally, I used it as an example for the week. Go read up the original teachings of RSI - J. Willes Wilder Jr.'s book and you would realize without any doubt how wrong this was. Nowhere did he mention this was how to use RSI. Nowhere!

Furthermore, I could not get a 14-day RSI reading of 25 for the close of business Friday, 13^th December 2002 when the Nikkei did post an 8-day losing streak at the close of that day. The 14-day RSI reading I could get was 38.59. See chart. This was calculated based on Wilder’s original method of calculation.

A lot of people read news and believe blindly. The source of the news should be reliable, shouldn't they? This is the problem. Wrong learning causes wrong usage and wrong usage causes wrong learning. This keeps on looping non-stop. It is a serious wrong which, single-handedly, I cannot correct.

Even if the Nikkei were to rebound from here it still will not validate this wrong usage. This is still the WRONG way to use the RSI. Please read the original material and stop learning the wrong thing. Learn to close your eyes and ears when you are fed the wrong information. If you are not sure then verify what you read or hear. I am sure you will be better off.

In the next article, The Relative Strength Index is not an Overbought/Oversold Indicator, I will explain what is wrong with this serious misinformation on the usage of the RSI.

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