10. Relative Strength Index (RSI)
1. What is Relative Strength Index (RSI)?
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. It ranges from 0 to 100 and is typically used to identify overbought or oversold conditions in a stock or asset.
2. Components of RSI?
RSI Value: Calculated based on average gains and losses over a set period (typically 14 periods).
Overbought Threshold: Usually set at 70.
Oversold Threshold: Usually set at 30.
Lookback Period: Default is 14, but can be adjusted for sensitivity.
3. Pros and Cons of RSI?
Pros:
Easy to understand and interpret.
Useful in spotting divergence between price and momentum.
Effective in range-bound markets.
Cons:
May produce false signals in strong trending markets.
Not predictive — shows current momentum, not future direction.
Can stay overbought or oversold for extended periods in trends.
4. What is the purpose of RSI in stock analysis?
To identify momentum shifts.
To spot overbought (≥70) or oversold (≤30) conditions.
To detect bullish or bearish divergences between price and RSI.
5. How is RSI calculated or derived?
Calculate average gain and average loss over the past n periods.
Compute the Relative Strength (RS):
RS=Average GainAverage LossRS = \frac{\text{Average Gain}}{\text{Average Loss}}
Calculate RSI:
RSI=100−(1001+RS)RSI = 100 - \left( \frac{100}{1 + RS} \right)
6. When should traders use RSI?
In sideways or range-bound markets to time entries/exits.
When spotting price-RSI divergences to anticipate reversals.
As a confirmation tool alongside trend indicators.
7. What are the limitations or risks of using RSI?
Not reliable in strongly trending markets.
May stay overbought or oversold for a long time.
Susceptible to whipsaws without confirmation.
8. What are common mistakes when interpreting RSI?
Selling immediately at 70 or buying at 30 without context.
Ignoring trend strength or market structure.
Not understanding the difference between divergence and reversal.
9. How can RSI be combined with other tools for better accuracy?
Combine with moving averages to filter trades by trend.
Use MACD or Stochastic Oscillator for momentum confirmation.
Pair with support/resistance levels or price patterns.
10. How do professional traders interpret RSI differently from beginners?
Professionals:
Focus on divergences, trend RSI behavior, and failure swings.
Adjust RSI period (e.g., 5, 14, 21) based on asset volatility.
Use RSI within multi-indicator systems or confluence zones.
Beginners:
Use RSI as a standalone overbought/oversold tool.
React instantly to 30/70 levels without deeper analysis.
Don’t adjust the period or interpret RSI in context of price action.
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