DataCamp
Course Outline

Visualize an indicator and guess its purpose - II

100xp

The Relative Strength Index (RSI) is another indicator that rises with positive price changes and falls with negative price changes. It is equal to 100 - 100/(1 + RS), where RS is the average gain over average loss over the lookback period. At various lengths, this indicator can range from a reversion indicator, to a trend filter, or anywhere in between. There are various ways of computing the RSI.

As you already know, RSI() takes in a price series price and a number of periods n which has a default value of 14. Some traders believe that the 2-period RSI, also known as the RSI 2, has even more important properties than the 14-period RSI.

In this exercise, rather than plotting this indicator on the actual price series, you'll look at a small, one year subset of SPY and how the RSI interacts with the price. The quantmod and TTR packages and SPY price series have been loaded into your workspace.

Instructions

  • Plot the closing price of SPY.
  • Plot the RSI 2 of the closing price of SPY.
  • Is this a trend or a reversion indicator? Print your answer as either "trend" or "reversion" in the console.
    Take Hint (-30xp)