Chapter 6: Technical Analysis
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Day 33: RSI — Is the Stock Tired or Ready to Sprint?
Relative Strength Index: 0 to 100, and everything in between
2 min read
📖 The Marathon Runner Analogy
A marathon runner who has sprinted hard for 10 miles is exhausted. Even if the finish line is visible, they need a breather before they can sprint again.
A stock that has gone up 30% in two weeks is also "tired." It needs consolidation — sideways movement, maybe a small pullback — before the next leg up.
RSI measures exactly this: how "exhausted" or "energised" a stock is relative to its recent performance. It's the stock market's fitness tracker. 🏃
A marathon runner who has sprinted hard for 10 miles is exhausted. Even if the finish line is visible, they need a breather before they can sprint again.
A stock that has gone up 30% in two weeks is also "tired." It needs consolidation — sideways movement, maybe a small pullback — before the next leg up.
RSI measures exactly this: how "exhausted" or "energised" a stock is relative to its recent performance. It's the stock market's fitness tracker. 🏃
RSI Formula
RSI = 100 - [100 / (1 + RS)]
RS = Average of up-closes / Average of down-closes (over 14 days by default)
Simpler explanation:
• Count how many of the last 14 trading days closed UP vs DOWN
• More up days = high RSI. More down days = low RSI.
• Result is always between 0 and 100.
RS = Average of up-closes / Average of down-closes (over 14 days by default)
Simpler explanation:
• Count how many of the last 14 trading days closed UP vs DOWN
• More up days = high RSI. More down days = low RSI.
• Result is always between 0 and 100.
Reading RSI — The Four Zones
70+
Overbought Zone 🚨
Stock has risen aggressively. Buyers may be exhausted. Consider booking profits. DON'T initiate new long positions here.
Stock has risen aggressively. Buyers may be exhausted. Consider booking profits. DON'T initiate new long positions here.
50–70
Bullish Zone ✅
Uptrend in progress. Buyers in control. Hold existing positions. New buys on pullbacks to support.
Uptrend in progress. Buyers in control. Hold existing positions. New buys on pullbacks to support.
30–50
Bearish/Neutral Zone ⚠️
Downtrend or sideways. Sellers have slight edge. Avoid buying until RSI recovers above 50.
Downtrend or sideways. Sellers have slight edge. Avoid buying until RSI recovers above 50.
<30
Oversold Zone 🛒
Stock has fallen hard. Sellers may be exhausted. Potential bounce/reversal coming. Look for buying opportunity in fundamentally strong stocks.
Stock has fallen hard. Sellers may be exhausted. Potential bounce/reversal coming. Look for buying opportunity in fundamentally strong stocks.
RSI Divergence — The Most Powerful RSI Signal
Divergence = Price and RSI moving in opposite directions
Bullish Divergence: Price making lower lows + RSI making higher lows → Selling momentum is weakening. Reversal coming up!
Bearish Divergence: Price making higher highs + RSI making lower highs → Buying momentum is weakening. Potential reversal downward!
This is considered one of the most reliable reversal signals in technical analysis.
Bullish Divergence: Price making lower lows + RSI making higher lows → Selling momentum is weakening. Reversal coming up!
Bearish Divergence: Price making higher highs + RSI making lower highs → Buying momentum is weakening. Potential reversal downward!
This is considered one of the most reliable reversal signals in technical analysis.
⚠️ RSI in Trending Markets — The Exception!
In a strong uptrend, RSI can stay above 70 for weeks or months. Blindly selling when RSI hits 70 would have caused you to miss enormous rallies in stocks like Reliance or Infosys.
Use RSI with: Support/Resistance + Moving Averages + Candlestick patterns = a complete picture. Never any single indicator alone.
In a strong uptrend, RSI can stay above 70 for weeks or months. Blindly selling when RSI hits 70 would have caused you to miss enormous rallies in stocks like Reliance or Infosys.
Use RSI with: Support/Resistance + Moving Averages + Candlestick patterns = a complete picture. Never any single indicator alone.
🎯 Today's Takeaway:
RSI measures momentum, 0–100. 70+ = overbought (be cautious). 30- = oversold (watch for opportunity). Divergence = most powerful signal. Always combine with other indicators. Tomorrow: MACD — two moving averages doing the tango!
RSI measures momentum, 0–100. 70+ = overbought (be cautious). 30- = oversold (watch for opportunity). Divergence = most powerful signal. Always combine with other indicators. Tomorrow: MACD — two moving averages doing the tango!