BAJAJ BROKING
March 03, 2025
7 mins read
The Relative Strength Index (RSI) is a tool that helps you understand how strong or weak the price of a stock or asset is. It shows if something is becoming too expensive (overbought) or too cheap (oversold).
It works by comparing how much a stock has gone up versus how much it has gone down over a set period. This way, you can guess whether prices might continue the same way or start to reverse.
Have you ever felt unsure about whether a stock is the right pick?
That’s where RSI comes in! Made by J. Welles Wilder Jr. in 1978, it helps you decide when it might be a good idea to buy or sell, based on how the market has been moving recently.
RSI is like a speedometer for price changes. It measures how fast and how much prices are moving. The score runs from 0 to 100.
If RSI is above 70, the stock may be too costly (overbought).
If RSI is below 30, the stock may be too cheap (oversold).
This helps you find good moments to enter (buy) or exit (sell) trades.
However, RSI works better when prices move within a range, not during very strong uptrends or downtrends. That’s why traders often combine RSI with other tools or patterns to double-check signals.
One common method is spotting divergence. If the price and RSI are moving in opposite directions, it may hint at a trend change.
RSI, or Relative Strength Index, is a trading indicator used to determine overbought and oversold market conditions. It considers average gains and losses compared to prices from the previous periods and then produces an index between 0 and 100 from that calculation.
The RSI is a technical indicator that measures the momentum of an asset price, usually stocks, Indices & ETFs. In short, the RSI indicates whether prices have moved too high or too low. It is generally seen as an oscillator because it often transitions between 0 and 100. In RSI trading scenarios, traders typically use readings over 70 to suggest that market prices are far too high, while readings under 30 imply they are too low.
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Don’t worry—it sounds harder than it is! Here’s the basic formula:
RSI = 100 – [100 / (1 + RS)]
Here, RS means Relative Strength, which is simply the average gain divided by the average loss over 14 days.
Steps:
Find the average gains and losses over the last 14 days.
Divide average gain by average loss to get RS.
Put RS into the formula above.
Example: If the average gain is 2 and the average loss is 1, then RS = 2 ÷ 1 = 2. Plugging it in, RSI = 66.67. That means the stock is moving toward the overbought zone but not yet above 70.
Traders often smooth out the numbers using moving averages to make RSI more accurate.
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. It operates on a scale of 0 to 100 and is primarily used to identify overbought or oversold conditions in a stock or other asset. RSI compares the magnitude of recent gains to recent losses to determine whether an asset’s price might be primed for a reversal or a pullback. Typically, a reading above 70 suggests that the asset may be overbought, while a reading below 30 indicates it could be oversold. This makes RSI a valuable tool for traders aiming to time their entries and exits. RSI works best in range-bound markets rather than during strong trends. Traders often use RSI in conjunction with other technical indicators or chart patterns to confirm signals. For example, an RSI divergence—when the price makes a new high or low that is not confirmed by the RSI—can signal a potential trend reversal. Overall, RSI helps assess whether an asset’s price has moved too far too fast, aiding traders in making more informed decisions based on momentum rather than price alone.
The RSI is calculated using a fairly straightforward formula, though understanding its components is essential to interpret it correctly. The basic RSI formula is:
where RS stands for Relative Strength. RS is calculated as the average gain over a set period divided by the average loss over that same period. The default period used is 14 trading days. Here's how it works:
For example, if a stock had average gains of 2 and average losses of 1 over 14 days, RS = 2/1 = 2. Plugging this into the formula, RSI = 100 – [100 / (1 + 2)] = 66.67. This RSI value indicates the asset is trending toward the overbought region but hasn’t reached the 70 threshold yet. Traders also smooth the gains and losses using exponential moving averages for more accurate RSI readings.
Condition | RSI Value | Market Signal |
Overbought | Above 70 | Indicates potential price correction or sell-off. |
Oversold | Below 30 | Suggests a possible price increase or reversal. |
RSI tells you whether a stock might be overpriced or underpriced:
Above 70 = Overbought → Could be time to sell or wait.
Below 30 = Oversold → Could be time to buy.
These levels help you understand when prices may be too high or too low and might soon return to normal. By learning to read RSI, you can make smarter investment choices.
Another handy way to use RSI is by looking for divergence. This happens when the RSI and the actual price are not moving in the same direction.
If the price makes higher highs but RSI makes lower highs → this could be a sign of bearish divergence (prices may fall soon).
If the price makes lower lows but RSI makes higher lows → this is bullish divergence (prices may rise soon).
Divergence often shows up before a big trend change, so it’s a powerful signal to watch.
RSI divergences are one of the most powerful signals traders look for. A divergence occurs when the price moves in one direction, but the RSI shows the opposite momentum. This often signals that a reversal could be coming soon.
Imagine a stock making lower lows, but the RSI forms higher lows. This mismatch suggests that selling momentum is weakening. Traders see it as a sign of a possible upward reversal.
On the other hand, if prices make higher highs while RSI shows lower highs, it indicates weakening buying strength. This often warns of a potential price drop.
Divergences appear before actual price reversals, giving traders a chance to prepare.
Traders often combine divergence signals with support-resistance levels or moving averages to avoid false alarms.
The Relative Strength Index (RSI) is one of the most widely used technical indicators in trading. It helps you judge whether a stock or index is overbought, oversold, or somewhere in between. Understanding RSI gives you an edge in timing entries and exits.
When RSI moves above 70, it signals potential overbought conditions. When it falls below 30, it suggests oversold levels. These zones help traders anticipate reversals.
RSI adds a layer of confidence to trading strategies. Instead of relying only on price charts, traders use RSI to confirm momentum.
RSI isn’t limited to stocks. You can apply it to forex, commodities, and indices, making it versatile for all kinds of traders.
RSI provides objective signals, helping you avoid impulsive decisions driven by fear or greed.
Like every tool, RSI isn’t perfect. Here’s what you should know:
It doesn’t look at volatility (how wild prices swing)
It’s a lagging indicator, meaning it follows price moves rather than predicting them.
Markets can stay overbought or oversold for a long time, so RSI alone isn’t always reliable.
That’s why you should combine RSI with other tools like volume or chart patterns for safer trading.
Feature | RSI | MACD |
Indicator Type | Momentum Oscillator | Trend-Following Indicator |
Measures | Overbought/Oversold Conditions | Convergence and Divergence of Moving Averages |
Timeframe | Short to medium-term | Medium to long-term |
RSI stands out from other technical indicators by focusing specifically on the strength and momentum of price movements over a specified period. Unlike moving averages, which smooth data over time, RSI provides quick signals for overbought and oversold conditions, making it a preferred tool in RSI trading. Other indicators, such as Bollinger Bands or MACD, focus on trend continuation, while RSI offers insights into possible trend reversals.
RSI not only reflects price movements but also provides insight into market psychology. When RSI indicates overbought conditions, it suggests that traders are overly optimistic, often leading to price corrections. On the other hand, when RSI signals oversold levels, it implies fear and pessimism in the market, which could indicate a price recovery. RSI trading helps traders understand and act on these psychological cues.
Cutler’s RSI, introduced by J. Cutler, uses a more consistent formula for calculating RSI compared to the traditional approach. It addresses the issue of smoothing errors in the RSI calculation and is particularly useful for traders who want a more precise momentum reading in RSI trading. Cutler’s RSI uses exponential moving averages instead of simple moving averages, offering greater accuracy for intraday and short-term trading.
By learning how RSI works, you can understand whether prices are going too high or too low. This helps you decide the right time to buy or sell.
RSI is not magic, but when you use it with other tools, it can give you a big advantage. With practice, you’ll be able to spot good opportunities and reduce your risks.
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The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. It ranges from 0 to 100 and helps traders assess whether an asset is overbought or oversold.
RSI is calculated using the formula: 100 - [100 / (1 + Average Gain / Average Loss)]. It helps gauge the momentum of stock price changes by comparing average gains and losses over a set period.
An RSI value above 70 typically indicates that a stock is overbought, suggesting that a price correction or pullback might be on the horizon.
The best RSI trading setup involves identifying overbought (above 70) and oversold (below 30) levels to time entry and exit points. Combining RSI with other indicators can enhance accuracy.
An RSI value below 30 signifies that the stock is oversold and may be undervalued, indicating a potential price reversal and buying opportunity.
RSI helps identify trend reversals by spotting divergences between price movements and the RSI line. A bullish divergence indicates an upward reversal, while a bearish divergence signals a downward shift.
Yes, RSI is often used in combination with other technical indicators like MACD or moving averages to confirm signals and improve trading decisions.
RSI divergence occurs when price movements and RSI are out of sync. A bullish divergence signals potential upward momentum, while a bearish divergence warns of possible downward pressure.
Traders typically use a 14-period RSI but may adjust it based on their strategy. Shorter periods like 7 enhance sensitivity, while longer periods like 21 smooth out signals.
While RSI is a useful indicator, it can sometimes provide false signals in strong trending markets. It’s most effective when used in conjunction with other indicators.
If the RSI goes above 70, it usually means the stock is overbought. In other words, the price has climbed too quickly and might soon drop a little or slow down.
The ideal way to use RSI is by watching when it goes above 70 or below 30. Above 70 often signals selling or waiting, while below 30 may mean buying. It works even better when combined with other indicators.
An RSI reading lower than 30, shows the stock has likely dropped too low, and you might have a potential opportunity to buy as it may pop back up.
RSI can help you identify trend changes through divergence. If the direction of the RSI and the price are moving in opposite directions, it usually means that trend is more likely to reverse soon, either up or down.
Yes, you can use RSI alongside tools like MACD or moving averages. This makes your trading decisions stronger because you’re confirming signals instead of relying on RSI alone.
RSI divergence happens when the price and RSI don’t match. If the RSI suggests strength but the price shows weakness, or vice versa, it could signal a change is coming. This is why divergence is important for spotting early trend shifts.
Most traders use a 14-day RSI, but this can be adjusted. A shorter period, like 7, makes RSI quicker and more sensitive. A longer period, like 21, makes it calmer and less jumpy.
Yes, RSI has limits. In strong trends, it can sometimes give false signals, showing overbought or oversold conditions even though the trend continues. That’s why traders often combine it with other indicators for better accuracy.
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