The Relative Strength Index (RSI) is a simple and popular tool used in stock trading to know if a stock is overbought or oversold. It shows how strong or weak a stock’s price is by measuring its recent price changes. RSI gives a number between 0 and 100, which helps investors understand when it might be a good time to buy or sell a stock. This tool is widely used because it makes stock analysis easier and helps traders avoid bad decisions.
What is Relative Strength Index (RSI)?
RSI is a technical indicator used by traders to measure the speed and change of a stock’s price movements. It helps show whether a stock is overbought (price too high) or oversold (price too low). The RSI number moves between 0 and 100. If the RSI is above 70, it often means the stock price may soon fall because it is overbought. If it is below 30, it means the stock may be oversold and could rise soon. This makes RSI a handy tool for spotting when a stock price may change direction.
How is RSI Calculated?
The RSI calculation looks at the average gains and losses of a stock’s price over a certain time, usually 14 days. It compares how much the price went up versus how much it went down during this period. This comparison is then converted into a number between 0 and 100. A higher RSI means the stock has had more gains recently, and a lower RSI means more losses. The formula makes it easy for traders to see if buying or selling is stronger in the market.
Because it uses recent price changes, RSI quickly reacts to the latest market movements, helping traders spot potential turning points in stock prices before they happen.
How Can RSI Be Used in Stock Analysis?
Investors and traders use RSI to find good moments to buy or sell stocks. When RSI goes above 70, it tells that the stock price is quite high, and it might soon fall. This is often a signal to sell or avoid buying at that time. When RSI goes below 30, it shows the stock might be cheap and ready to rise, which is a good time to buy.
Besides spotting overbought and oversold conditions, RSI also helps detect when the stock price trend is losing strength. This can alert traders to prepare for price changes. Many use RSI together with other tools to make smart trading choices.
What Are RSI Trading Strategies?
Many traders follow simple rules with RSI to make decisions. One popular method is to buy stocks when RSI falls below 30 and sell when it goes above 70. This takes advantage of price changes after the stock becomes oversold or overbought.
Another strategy is called divergence. This happens when the stock price moves in one direction but RSI moves the other way. For example, if stock price makes a new high but RSI makes a lower high, it may signal the price is weakening and could reverse soon. Traders use this as a warning sign.
Many combine RSI with other indicators like moving averages or volume to confirm signals and avoid mistakes.
What Are the Limitations of RSI?
Even though RSI is useful, it is not perfect. In strong trending markets, a stock can stay overbought or oversold for a long time, which means RSI may give false buy or sell signals. This can cause traders to act too early or too late.
RSI also does not consider external news or market events that can affect stock prices suddenly. So, relying only on RSI may lead to wrong decisions.
That’s why smart traders use RSI along with other tools and always watch the market carefully before making trades.
Is RSI Useful for Indian Stock Market Traders?
Yes, many traders in India use RSI daily because it works well in Indian stock markets. Indian trading platforms provide easy access to RSI tools. Investors here use RSI to decide when to enter or exit trades, helping them make better profits.
Because Indian markets can be fast and volatile, RSI helps traders spot important price changes early. It is popular among beginners and experienced traders in India alike.
Contact Angel One Support at 7748000080 or 7771000860 for mutual fund investments, demat account opening, or trading queries.
© 2025 by Priya Sahu. All Rights Reserved.
