Relative Strength Index (RSI)

Understanding the RSI

The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of recent price changes. It is displayed as a line that oscillates between 0 and 100, providing a quick visual gauge of whether a stock is potentially overbought or oversold.

How RSI Is Calculated

The RSI compares the average gains to the average losses over a specified period (typically 14 days). The formula produces a value between 0 and 100:

• RSI above 70 — The stock is considered overbought. It has risen rapidly and may be due for a pullback or consolidation.
• RSI below 30 — The stock is considered oversold. It has fallen sharply and may be due for a bounce.
• RSI around 50 — Neutral. No strong momentum in either direction.

Using RSI for Trading Decisions

On the NSE, if Equity Group (EQTY) drops sharply over two weeks and its RSI falls to 25, this suggests the stock is oversold. It does not guarantee a reversal, but it tells you the selling may be overdone and a bounce is more likely. Conversely, if EQTY rallies hard and the RSI hits 80, caution is warranted as the stock may be overextended.

RSI Divergence

RSI divergence is one of the most reliable signals this indicator provides:

• Bullish divergence — The stock makes a new low, but the RSI makes a higher low. This signals weakening selling pressure and a potential reversal upward.
• Bearish divergence — The stock makes a new high, but the RSI makes a lower high. This warns that buying momentum is fading despite the rising price.

Important Caveats

RSI can remain overbought (above 70) or oversold (below 30) for extended periods during strong trends. A stock in a powerful uptrend can have an RSI above 70 for weeks. Never use RSI in isolation — always combine it with trend analysis and other indicators for confirmation.