14. What is RSI (Relative Strength Index)?
The Relative Strength Index (RSI) is a momentum oscillator used in technical analysis to measure the speed and magnitude of recent price changes. RSI helps traders identify whether a stock is overbought (likely to fall) or oversold (likely to rise), making it a powerful tool for spotting potential reversals or entry/exit points.
RSI values range from 0 to 100 and are typically plotted as a line below the main price chart.
Interpreting RSI Values
| RSI Value | Interpretation |
|---|
| Above 70 | Overbought — Price may correct |
| Below 30 | Oversold — Price may bounce |
| Between 30–70 | Neutral zone — Trend continuation |
RSI doesn’t predict direction — it highlights extreme conditions where a reversal or pause may occur.
What Does RSI Tell You?
- RSI above 70 → Asset has risen too quickly; pullback may be due
- RSI below 30 → Asset has fallen sharply; bounce may occur
- Divergences between price and RSI can signal a reversal
Example: RSI in Action
Stock: ABC Ltd.
- RSI reaches 78 while price hits a new high → Potential profit booking ahead
- RSI falls to 25 near a strong support zone → Watch for bounce or reversal
RSI Divergence – Hidden Signals
| Type | What It Means |
|---|
| Bullish Divergence | Price makes lower lows, RSI makes higher lows → Possible upward reversal |
| Bearish Divergence | Price makes higher highs, RSI makes lower highs → Possible downward reversal |
Divergences are most powerful at support/resistance zones.
Best RSI Settings for Traders
| Use Case | RSI Setting | Timeframe |
|---|
| Swing Trading | 14-period (default) | Daily / 1H chart |
| Scalping / Intraday | 5–7 period | 5min / 15min charts |
| Long-Term Investing | 14 or 21 period | Weekly chart |
RSI vs Other Indicators
| Feature | RSI | MACD | Moving Averages |
|---|
| Type | Momentum oscillator | Trend + Momentum | Trend-following |
| Use | Identify extremes | Signal crossovers | Trend direction & support |
| Best For | Reversal spotting | Entry/Exit timing | Trend confirmation |
Key Takeaways
- RSI is a momentum indicator ranging from 0–100
- RSI >70 = overbought, <30 = oversold
- Helps identify potential trend reversals and entry/exit signals
- Divergence between RSI and price is a strong reversal clue
- Combine RSI with support/resistance zones for high-probability trades