The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of price changes. Developed by J. Welles Wilder, it oscillates between 0 and 100 and tells you whether a stock is overbought or oversold.
RSI Formula
RSI = 100 โ (100 รท (1 + RS))
RS = Average Gain รท Average Loss (over 14 periods)
Reading RSI Values
| RSI Level | Signal | Action |
|---|---|---|
| Above 70 | Overbought | Consider selling or taking profits |
| 50โ70 | Bullish momentum | Stay long, look for continuation |
| 50 | Neutral | Midpoint โ watch for direction |
| 30โ50 | Bearish momentum | Caution, possible downtrend |
| Below 30 | Oversold | Consider buying โ potential reversal |
In a strong uptrend, RSI often stays in the 40โ80 range and rarely reaches 30. In a downtrend, it stays in the 20โ60 range. Adjust your interpretation based on the trend.
RSI Divergence โ The Most Powerful Signal
RSI divergence occurs when price and RSI move in opposite directions. This is often an early warning of a trend reversal.
Bullish Divergence: Price makes a lower low but RSI makes a higher low. This suggests selling pressure is weakening โ potential reversal upward. Common at major NSE stock bottoms.
Bearish Divergence: Price makes a higher high but RSI makes a lower high. Suggests buying pressure is weakening โ potential reversal downward.
RSI Strategies for NSE
Strategy 1 โ RSI Reversal (Range Markets)
Buy: RSI falls below 30 and turns back up
Sell: RSI rises above 70
Works best on: Banking stocks, FMCG (range-bound sectors)
Timeframe: Daily
Sell: RSI rises above 70
Works best on: Banking stocks, FMCG (range-bound sectors)
Timeframe: Daily
Strategy 2 โ RSI Trend Filter
Only take long trades when RSI is above 50
Only take short trades when RSI is below 50
Use with: EMA crossover or breakout strategy
Effect: Filters out trades against the prevailing momentum
Only take short trades when RSI is below 50
Use with: EMA crossover or breakout strategy
Effect: Filters out trades against the prevailing momentum
Strategy 3 โ RSI Centerline Cross
Buy: RSI crosses above 50 from below
Sell: RSI crosses below 50 from above
Works best on: NIFTY 50 index (daily)
Fewer but higher-quality signals than 30/70 strategy
Sell: RSI crosses below 50 from above
Works best on: NIFTY 50 index (daily)
Fewer but higher-quality signals than 30/70 strategy
Common RSI Settings
- RSI(14) โ Default, most widely used, works well on daily charts
- RSI(7) โ More sensitive, better for swing trading
- RSI(21) โ Smoother, better for positional trading
Always check RSI on the higher timeframe first. If the weekly RSI is overbought (above 70), be cautious about taking long trades even if the daily RSI shows an oversold signal.
Limitations
- In strong trends, RSI can stay overbought or oversold for extended periods
- Works better in range-bound markets than in trending markets
- Combine with a trend indicator (EMA, Supertrend) to filter signals
