Relative Strength Index RSI: How It Signals Buy Sell Decision in Stock Trading


Similarly, when both indicators are not agreeing on a signal, the chance for false signal increases. Here, when an RSI trendline breaks, it could indicate a trend reversal or price continuation. Bearish failure swing forms after the price have gone to the overbought territory. Here, the price has to cross back below 70 after hitting the overbought territory first. Then, it bounces back and forms another high in the overbought territory.

  • Moving average crossovers that are relatively short-term, such as the 5 EMA crossing over the 10 EMA, are most suited to complement RSI.
  • There is a better possibility of a trend reversal or a correction at such extreme points.
  • RSI calculated on a period of 250 will have more smoothening effect than RSI calculated on 30 periods.
  • An easy way to learn everything about stocks, investments, and trading.
  • However, it cannot be considered as a sole indicator of price velocity and predicting the price trend.

As the name suggests, the RSI indicator helps traders and investors understand the speed and momentum with which the price of a security moves. You must have come across price charts displayed on trading terminals. These price charts usually have lines plotted in smaller panels above and below them. These lines are indicators and helps traders analyse the future price movement of a stock. They noticed that investors suffered as a result of portfolio securities being mismanaged. Selecting inappropriate securities may result in investor losses.

Relative Strength Index (RSI) Indicator – What, How To Use and Significance

Explore regression analysis and hypothesis testing as valuable statistical techniques in equity analysis. RSI is best used when seen as an indicator that gives you a signal to be ready to face a trend change. The best practice is to use another indicator to confirm the trend before making a move. RSI can be used as a trend-confirming tool for MACD and vice versa. When both the indicators agree on a signal, the chance for it to be false tends to decrease.

Let’s put the values in the RSI formula and check if the share is overbought or oversold. Very Excellent Course, This Course was very helpful to start stock market trading, everthing was explained including minor points. RSI convergence is generally formed when the price is falling.

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When the RSI crosses the centerline from below and marches towards 70, the same is a good enough indication to go long. Similarly, when RSI breaches the centerline from above and moves towards 30, the same is confirmed to enter short positions. While 70 and 30 are the two absolute confirmation levels, the movement of RSI towards these levels can also be considered as an entry or exit point. When a stock is overbought, it means that it has risen too much too quickly and may be due for a correction. The formula to calculate the RSI indicator is mentioned below.

Relative Strength Index (RSI)

The RSI helps to spot reversal patterns early making it the right tool for such traders. Similarly, in pullback trading, the RSI indicator can be used to make the right entry point in an established trend when the market has pulled back. An RSI divergence tool spots the loss of momentum in the current market trend and signals possible reversal in trends. The RSI divergence is an earlier indication of a possible break of trend as it doesn’t correlate with the current price action. The RSI divergence indicator signal suggests traders when RSI and the price action of the stock are no longer showing the same momentum. The relative strength index indicator falls under the category of momentum indicators.


Traders can use divergences between the price and the RSI indicator in order to get buy or sell signals. A divergence occurs when the price and the indicator move in opposite directions. Another important thing to note is that the overbought and oversold levels of the RSI indicator may vary during strong uptrends or downtrends. The chart clearly shows a trend reversal because of bullish divergence. Here the RSI is around the oversold levels of 30 and shows divergence with the price action in theBank Nifty. It is an important reversal signal and the RSI indicator generates a buy signal.

One Reply to “How To Trade with The Moving averages and RSI Indicator (Relative strength index)?”

The ideal entry 11 historic bear markets based on RSI are when the moving average of the RSI is rising for the defined candles in a row and the RSI is below 70. The moving average will define a trend and the RSI below 70 will ensure that the decision to enter the market is not at the top of the trend. RSI helps traders identify whether a stock is overbought or oversold. RSI is an indicator that helps traders capture market momentum by measuring the magnitude of price fluctuations. It uses a combination of different indicators to detect and filter the potential lows and opens multiple positions to spread the risk and opportunities for… Update your mobile number & email Id with your stock broker/depository participant and receive OTP directly from depository on your email id and/or mobile number to create pledge.

RSI can be combined with other technical indicators like MACD and moving average crossover to confirm trades. Swing traders are always looking for trading signals from RSI. They keep an eye on stocks where price momentum is fading out or picking up strength. Similarly, when the RSI rises above 70, the security is considered overbought, and a price reversal or correction may be expected.


Like every indicator and investment strategy, RSI indicators also have certain limitations. There is a basic premise to interpret the RSI indicators and understand the price movements of a stock. Traders, analysts, or investors review the RSI indicator of the stock and its movement between zero to 100. Additionally, markets may remain at extreme levels for extended periods. Therefore, the RSI should be used with other technical analysis tools. Understanding how to calculate and read RSI levels is valuable for any investor’s portfolio.

share price

There is a better possibility of a reversal or a correction at such extreme points. Stock brokers can accept securities as margins from clients only by way of pledge in the depository system w. On-Chart QQE of RSI on Variety MA is usually calculated using RSI. The results are completely different than the original QQE. Personal Loan, Fixed Deposit, EMI Card are provided by Bajaj Finance Limited.

These are not Exchange traded products, and the Member is just acting as distributor. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The RSI, like most indicators is the calculation of averages, this is what the calculation looks like. We at Enrich Money do not provide any stock tips to our customers nor have we authorised anyone to trade on behalf of others. If you come across any individual or organisation claiming to be part of Enrich Money and providing such services, kindly intimate us immediately.

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Stock Brokers can accept securities as margin from clients only by way of pledge in the depository system w.e.f. September 1, 2020. It gives details such as, double tops or double bottoms which a line chart can’t explain. Further, it also throws lights on the support or resistance level of stock.

With an understanding of the RSI technical indicator and the two RSI strategies, one may trade or invest in stocks and make a profit. Traders lose money because they lack a suitable strategy and trading guidelines to follow while trading. Additionally, the investor may lose money in the stock market by relying on technical indications.

While discussing some popular technical indicators earlier, we have briefly described the RSI indicator. Now in this section, let us elaborate on the concept and learn how to use the RSI indicator as a tool in technical analysis. In this example we can see that several false signals were called during a downtrend and would have resulted in a loss if on had held on. If the exit strategy was to exit at a 4% profit per trade then 3 out of 4 trades would be profitable.

The Complete Stock Market Technical Analysis Course

Post that, it moves again but rises less than the previous high of 70, thereby, creating a failure swing. It then falls below the fail point there creating a bearish failure swing. It acts as a signal for the trader to go for a short position in the security. These three indicators gauge market momentum but use different techniques.

Because offers free charting, these new RSI strategies may be used in observational research. We have described how to apply the RSI technical indicator to a chart and then how to analyze a trend using a new RSI technique in the paper that follows. To compute the F-test, we first estimated the return in a particular year of both strategies and then calculated the F- statistical value and P-value in excel.

The RSI’s hint of overbought circumstances and a potential trend reversal is confirmed by the 5 EMA moving from above to below the 10 EMA. On the other hand, an upside crossing offers still another hint that a market might be oversold. It is primarily used to attempt to identify overbought or oversold conditions in the trading of an asset.

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This implies that the study indicates that short-term trends will persist, at least temporarily. It seems as if the conventional view is incorrect, while the alternative understanding produces beneficial results. Using the RSI version that we suggest yields the best results. It is calculated using a formula that compares the extent of recent gains and losses to assess whether a market is trending up or down. With the help of RSI analysis, any trader and investor can make a profitable entry or exit in the financial market. Before we jump on to understanding RSI, we must learn about oscillators.

average gain

Wilder’s formula was as an improvement on calculating RS, which turned it into an oscillator that swings between ‘0’ and ‘100’ to indicate when the market is more volatile or less. RSI shows zero value when the Average Gain value equals zero. For example, on 14 days period, RSI zero is an indication that price movement has been lower for the period, and there is no gain to measure.