10. Relative Strength Index (RSI)

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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.

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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.

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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.

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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.

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5. How is RSI calculated or derived?

1. Calculate average gain and average loss over the past n periods.

2. Compute the Relative Strength (RS):

   RS=Average GainAverage LossRS = \frac{\text{Average Gain}}{\text{Average Loss}}

3. Calculate RSI:

   RSI=100−(1001+RS)RSI = 100 - \left( \frac{100}{1 + RS} \right)

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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.

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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.

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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.

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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.

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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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