What is RSI (Relative Strength Index)
The Relative Strength Index (RSI) is a popular momentum indicator used in technical analysis to measure the speed and change of price movements. It helps traders identify overbought and oversold conditions in stocks, commodities, and other assets.
RSI Formula
RSI=100−(1001+RS)RSI = 100 – \left( \frac{100}{1 + RS} \right)
Where:
- RS (Relative Strength) = Average Gain / Average Loss over a given period (default = 14 days).
How to Interpret RSI?
📊 RSI values range from 0 to 100:
- Above 70 📈 → Overbought (possible price correction or reversal).
- Below 30 📉 → Oversold (possible upward bounce).
- 50 Level → Neutral (balance between bulls & bears).
Trading Strategies Using RSI
1️⃣ Overbought & Oversold Strategy
- Buy when RSI < 30 (stock may be undervalued).
- Sell when RSI > 70 (stock may be overvalued).
2️⃣ RSI Divergence Strategy
- Bullish Divergence (Price ↓ but RSI ↑) → Possible uptrend.
- Bearish Divergence (Price ↑ but RSI ↓) → Possible downtrend.
3️⃣ RSI + Moving Average Crossover
- Buy when RSI crosses 30 and price is above the 50-day Moving Average.
- Sell when RSI crosses 70 and price is below the 50-day Moving Average.
Example of RSI in Action
- Stock: Reliance Industries
- RSI 85 → Overbought → Possible correction.
- RSI 25 → Oversold → Potential bounce-back.
Limitations of RSI
❌ Can give false signals in strong trends.
❌ Works best in sideways markets, less reliable in trending markets.
❌ Should be used with other indicators like MACD, Moving Averages, etc.
📌 RSI is a powerful momentum indicator for traders.
📌 Best used with support/resistance levels & other indicators.
📌 Helps in timing entry & exit points effectively.
Would you like RSI-based trading strategies for NIFTY 50 stocks? 📊🚀
