RSI – Relative Strength Index
Relative strength index is one of best and effective technical indicators used to make trading decisions in stock market. Relative strength index is a widely used technical indicator that helps the traders to understand the strength of price movement of an asset. The strength of price action of an asset is identified by analyzing whether the asset is oversold or over bought. Like any other technical indicators RSI also, will not work in every market condition. It has to be clubbed with other technical indicators to overcome false signals and improve trading outcome. When the RSI of an asset is above 70 range, the asset is considered as in an over bought condition. Traders used to sell this asset expecting there will be a profit booking or trend reversal in the asset. When the RSI of an asset is below 30, the asset is considered as oversold. Traders used to take long positions in asset when over sold expecting a trend reversal or buying momentum. RSI helps traders and investors to identify and understand the oversold and overbought condition of an asset. RSI can be used along with other technical indicators like MACD, Moving Average, Volume etc. to make trading journey more successful.
- The most used Leading Momentum Indicator in market is Relative Strength Index (RSI).
- RSI is also an Oscillating Indicator
- RSI provides a relative evaluation of the strength of an Assets recent price performance
- The range of the RSI indicator is 0 to 100. Oversold condition of RSI indicator is lower than 30 and overbought condition is higher than 70.
- RSI indicator works best in trending market
How RSI Works?
Let’s understand how Relative strength index works to realize the logic behind the trading signals provided by the indicator.
First, RS (Relative Strength) has to be calculated
- Relative strength (RS) can be calculated by Average Closes Up in n periods / Average Closes Down in n periods
Then RSI is calculated
- RSI can be found by 100 (100/1+RS)
- The RSI indicator swings in a range of 0 and 100.
- When RSI is in Oversold and overbought condition, it does not mean a sudden trend reversal or price correction can happen. It can be considered as an indication and can take positions accordingly.
- RSI also can give false signals like any other technical indicators. RSI works best only in trending market, so traders have to club with other technical indicators to make trading journey better.
RSI Trading Strategy
Let’s understand RSI trading strategy in detail with a live example of Nifty 50 trading chart. We can see the RSI indicator in the bottom side of image.
RSI Strategy In Overbought Condition
When the RSI is in over bought condition traders and investors takes short positions and book profits expecting that the asset is overbought and there is high potential for a price correction and trend reversal. While analyzing the Nifty 50 trading chart image, we can clearly see that Nifty 50 has been falling strongly in both conditions after RSI indicator has indicated that the asset is in over bought condition. With these analysis traders are able to take high probable trades in market to make an income. RSI indicator is the best available momentum indicator., mastering RSI will help you achieve the dream of becoming an amazing trader.
RSI strategy In Over Sold condition
When the RSI indicator of an asset in on oversold condition, traders and investors takes long positions expecting that the price of the asset will move up. While analyzing the Nifty 50 trading chart in above image, we can clearly see that price of Nifty 50 has been moving up strongly after RSI indicator has showed an oversold signal. If trader has entered into the position that RSI strategy has suggested, trader should have made a good profit from that trade. RSI enables traders to understand strength of asset to make intelligent trading decision in stock market.
Conclusion
RSI is one of the most reliable technical indicators available in the market. But as a technical indicator RSI will not provide 100 percent accurate signals, so trader has to take positions in market along with personal analysis and other indicators to become successful. All the analysis shared above are for educational purpose only. Please don’t take positions in market considering it as a recommendation. Check out this article to learn about different technical indicators in stock market.
