BAJAJ BROKING
Traders in the stock market often perform technical analysis to predict price movements in an asset. A major part of this analysis involves the study of various technical indicators to identify potential trading opportunities. Among the many indicators that are used, the Relative Strength Index is one of the most popular. Here’s everything you need to know about this technical indicator and how you can use it to plan your trades.
The Relative Strength Index, also known as RSI, is a technical indicator used to determine the speed and the quantum of change in the price of an asset. Using the indicator, you can quickly ascertain whether an asset is overbought or oversold. Since it is a type of momentum oscillator, it is usually represented as a line graph.
Additional Read: What is a Positive Volume Index?
Now that you’re aware of what the Relative Strength Index is, let’s look at the formula used to calculate it. Unlike most other technical indicators, calculating the RSI is slightly more challenging since it involves the use of a two-part formula.
Formula: Part 1
RSI = 100 – [100 ÷ {1 + (average gain during the period ÷ average loss during the period)}] |
In this formula, the average loss during the period is represented as a positive value. Usually, the Relative Strength Index for any asset is calculated for 14 days.
Formula: Part 2:
RSI = 100 – [100 ÷ {1 + (previous average gain * 13) + current gain ÷ (previous average loss * 13) + current loss}] |
Once the two-part calculation is done, the results are plotted on a line graph below an asset’s price chart. Fortunately, as a trader, you don’t have to manually calculate the RSI for any asset. Most technical charting tools and trading platforms readily offer this information, which you can simply factor into your trading decisions.
Additional Read: Scalping Trading
The RSI’s line graph is represented on a scale of 0 to 100. If the Relative Strength Index of an asset moves to 30 or below on the line graph, it signifies an oversold condition. On the other hand, if the indicator moves to 70 or above on the line graph, it signifies an overbought condition.
An asset that stays in an overbought or an oversold territory may undergo a trend reversal shortly. This effectively means that oversold assets may turn bullish and overbought assets may turn bearish. You can use this information to plan your trades accordingly.
However, it is essential to keep in mind that an asset may stay in either the overbought or oversold territories for a long time without showing any signs of a trend reversal. As a trader, you need to account for such behaviour when you place a trade. The best way to circumvent such a situation would be to use other technical indicators to candlestick patterns to confirm the onset of a trend reversal before taking up a position in the asset.
A Relative Strength Index divergence is a situation where the RSI of an asset moves in the opposing direction to the said asset’s price. There are two kinds of RSI divergences that you may encounter – a bullish divergence and a bearish divergence.
In a bullish divergence, the RSI of the asset is in the oversold territory (below 30 on the scale) and makes higher lows. At the same time, the asset’s price makes lower lows. If the RSI breaks out of the oversold territory, it indicates a bullish reversal.
In a bearish divergence, the RSI of the asset is in the overbought territory (above 70 on the scale) and makes lower highs. At the same time, the asset’s price makes higher highs. If the RSI breaks down from the overbought territory, it indicates a bearish reversal.
Additional Read: What Is Arbitrage?
The Relative Strength Index is one of the most important tools for a trader. Apart from helping you identify whether an asset is overbought or oversold, the indicator can also validate existing trends and determine potential trend reversal points.
However, as with any technical indicator, the Relative Strength Index may not always generate accurate trading signals. Therefore, it is advisable to read it in conjunction with other indicators and chart patterns. This will provide you with a better context of an asset’s price movements.
You May Also Like:
Share this article:
NHPC Q2 Results FY24-25 Preview | Estimate
08 Nov, 2024 | 2 Min. read
Mahindra & Mahindra Raises Fy25 Tractor Growth Forecast Amid Strong Q2 Results
08 Nov, 2024 | 3 Min. read
Tata Power Partners with Noida Airport for ₹550 Cr Renewable Energy Project
08 Nov, 2024 | 3 Min. read
MOIL Achieves Record October Production with 1.47 Lakh Tonnes, Up 32% YoY
08 Nov, 2024 | 2 Min. read
Commodities Market Today | WTI, Brent Crude, Gold, and Silver See Gains in Market Prices
08 Nov, 2024 | 1 Min. read
Share Market Today | Gift Nifty Hints At Flat Start; Markets In Range-Bound Trend
08 Nov, 2024 | 4 Min. read
Fed Cuts Rate by 25 Bps to 4.5-4.75% to Support Cooling Economy
08 Nov, 2024 | 2 Min. read
Gold Rate Today | Gold Rises 1.5% To $2,715.30, Silver Gains 2.5% To $32.11
08 Nov, 2024 | 2 Min. read
RVNL Q2 Results FY24-25 Highlights
08 Nov, 2024 | 2 Min. read
MRF Q2 Results FY24-25 Highlights
08 Nov, 2024 | 2 Min. read
Nerolac Paints Q2 Results FY24-25 Highlights
07 Nov, 2024 | 1 Min. read
Trent Q2 Results FY24-25 Highlights
07 Nov, 2024 | 2 Min. read
RBI Launches ULI: Transforming Loan Access
August 27, 2024 | 4 Min. read
Textile Sector in India
September 20, 2024 | 5 Min. read
List of IPOs with DRHPs Filed
November 30, 2023 | 3 Min. read
Aditya Birla Group
September 28, 2023 | 10 Min. read
Bajaj Housing Finance Ltd IPO: Things Smart Investors Need to Know
September 05, 2024 | 4 Min. read
Budget Stock Ideas 2024-2025 | Stocks to Buy Today
July 24, 2024 | 4 Min. read
IPO Eligibility Criteria : Full Details
March 15, 2024 | 6 Min. read
What Is the Lock-In Period in IPOs?
October 18, 2023 | 6 Min. read
Godfrey Phillips Announces 2:1 Bonus Shares
September 16, 2024 | 7 Min. read
Jindal Group- A Comprehensive Analysis
September 27, 2024 | 7 Min. read
Level up your stock market experience: Download the Bajaj Broking App for effortless investing and trading