Relative Strength Index (RSI)

TradingFunda

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How to plot RSI?

✅ RSI is usually drawn as a separate line chart, usually below the price chart, to maintain the same time scale.

✅ In your trading platform, go to “Charts”, then to “Studies” and choose RSI from the available options. The default set-up of RSI in most of the trading platforms will show the period as 14.

✅ Overbought level as 70 and oversold level as 30. Let us retain the period as 14 but change the overbought level as 80 and oversold level as 20.

✅ Relative Strength Index (RSI)

What is RSI?

📝 RSI stands for the Relative Strength Index. RSI calculates strength i.e., speed and direction of the trend a stock’s price, and conveys an early sign of trend reversals.

✔️ It compares the stock’s gains and losses in prices during the specified period.

✔️ That is RSI measures how well the stock is performing against itself by comparing the strength of its up days with the strength of its down days.

Identifying overbought/oversold levels:

✔️ As the RSI value will always move between 0 and 100, the value will be 0 if the stock falls on all 14 days, and 100 if the price moves up on all the days.

✔️ This implies that the RSI is much useful to ascertain the overbought/oversold level of stock. Generally, RSI value above 70 is considered as ‘overbought zone’ and value below 30 is considered as ‘oversold zone’.

✔️ However, some traders prefer values 80 and 20; some prefer values 75 and 25 also. Traders can decide on the selection of values depending upon the inherent volatility of the concerned stock.

✔️ For instance, highly volatile stocks (also called high beta stocks) may hit the overbought and oversold levels more frequently than stable stocks, if the 70 and 30 levels are maintained.

Trend Direction:

“Trend is your friend” is the golden rule of technical analysis. Traders are supposed to trade in the direction of the market trend only. RSI is much useful in determining the trend.

✔️ For instance, RSI is usually moving between 40 and 80 and rarely falls below 40 in the case of a stock in strong uptrend. In such cases of stocks in uptrend, one is not supposed to go short. The stock may be bought at the RSI value of 40 and covered by selling when the RSI value reaches the value 80. Stocks in strong downtrend will be mostly moving between 20 and 60, and one can consider going short if and when the RSI touches the value 60.
 
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