RSI
The Relative Strength Index (RSI) measures momentum and identifies overbought or oversold conditions. It's one of the most popular oscillators.
RSI oscillates between 0 and 100. High values suggest overbought conditions; low values suggest oversold conditions.
What is RSI?
RSI measures:
- The speed and magnitude of recent price changes
- Momentum – is it gaining or losing strength?
- Potential reversal zones
Created by J. Welles Wilder in 1978, it remains widely used today.
How to Read RSI
The RSI scale:
| RSI Level | Interpretation |
|---|---|
| Above 70 | Overbought (potential decline) |
| 50-70 | Bullish momentum |
| 50 | Neutral (midpoint) |
| 30-50 | Bearish momentum |
| Below 30 | Oversold (potential bounce) |
In strong trends, RSI can stay overbought or oversold for extended periods. Overbought doesn't mean "sell immediately."
Standard RSI Period
- Default: 14 periods
- Shorter (7-9): More sensitive, more signals, more false signals
- Longer (20-25): Smoother, fewer signals, more reliable
Using RSI
Overbought/Oversold
Basic strategy:
- RSI above 70: Consider taking profits or avoiding new buys
- RSI below 30: Consider buying
But context matters:
- In uptrends: RSI can stay above 70 for a long time
- In downtrends: RSI can stay below 30 for weeks
RSI overbought in an uptrend often means strong momentum, not imminent reversal. Use it in context.
RSI Divergence
One of the most powerful RSI signals:
Bullish Divergence:
- Price makes lower low
- RSI makes higher low
- Suggests weakening selling pressure
- Potential reversal up
Bearish Divergence:
- Price makes higher high
- RSI makes lower high
- Suggests weakening buying pressure
- Potential reversal down
RSI Trend Confirmation
In uptrends:
- RSI typically ranges 40-80
- Pullbacks find support around 40-50
- Drops below 40 signal trend weakening
In downtrends:
- RSI typically ranges 20-60
- Rallies meet resistance around 50-60
- Rises above 60 signal trend weakening
RSI Failure Swing
A classic reversal pattern:
Bullish Failure Swing:
- RSI falls below 30 (oversold)
- Bounces above 30
- Pulls back but stays above 30
- Breaks above the prior RSI high
Bearish Failure Swing:
- RSI rises above 70 (overbought)
- Falls below 70
- Rallies but stays below 70
- Breaks below the prior RSI low
Common Mistakes
| Mistake | Problem |
|---|---|
| Using in isolation | Combine with price patterns and support/resistance |
RSI vs Price
| Signal | What To Do |
|---|---|
| Price at support + RSI oversold | Strong buy signal |
| Price at resistance + RSI overbought | Strong sell signal |
| Divergence at key level | High probability reversal |
Key Takeaways
- RSI measures momentum on a 0-100 scale
- Above 70 = overbought; below 30 = oversold
- Divergence between RSI and price suggests reversals
- Context matters – overbought ≠ sell in a strong uptrend
- Combine with other analysis for best results
Next: Let's learn about MACD – another powerful momentum indicator.
Sources & Disclaimer
- Standard Market Conventions for Technical Analysis
- BSE/NSE Charting and Analysis Guides
Note: Any benchmarks (e.g., "Good ROE is > 20%", or specific P/E ranges) are simplified industry heuristics for educational purposes. True evaluation depends on specific industry context, market cycles, and individual company circumstances.