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RSI stands for Relative Strength Index and RSI Indicator is a popular and important indicator used by the trader while trading in the stock market. RSI indicator indicates the strength of the momentum of the trend or price of the stock. It is used with one or more other technical Indicators like MACD to assess the market behaviour.

What is RSI Indicator

RSI indicator is an oscillator which oscillates between the range of 0 – 100. This oscillator cannot go above 100 and below 0 in its pattern. It was developed and designed by an American Mechanical Engineer named J Welles Wilder in the year 1978. He also invented other indicators like ADX, ATR, and Parabolic SAR which are used in the technical analysis of the stocks in the stock market for forecasting their price movement.

It is a leading indicator means it indicates the future possible trend based on the previous data used by it in its calculations. Hence it can be used to spot the general trend of the stock price movements by the traders.

Decoding the Oscillation of RSI Indicator

RSI Indicator is a momentum oscillator used to indicate the strength and thereby help a trader forecast the possible future stock direction. Since it is an oscillator, it will oscillate between a range and that range is from 0-100.

When the value of RSI goes beyond 70, it is generally believed that the market is now in an overbought condition. But it is just a probability and not confirmation because sometimes an RSI level above 80 indicates a strong Bullish influence. When the value of RSI goes below 30, it is generally believed that the market is now in an oversold condition.

RSI Indicator Time frame

Before we start trading in the market using the RSI indicator in the intraday trading using a daily charting timeframe, we must know about the RSI levels in weekly and monthly timeframes. 

Weekly RSIMonthly RSIDaily RSI
Above 50Short-term Bullish Momentum
Below 50Short-term Bearish Momentum
Above 50Long-term Bullish Momentum
Below 50Long-term Bearish Momentum
Between 50-100Above 70Bullish Momentum
Between 50-100Below 30Bearish Momentum
Above 70Above 70If Daily RSI goes above 70, it indicates
strong Bullish Momentum
Below 30Below 30If Daily RSI goes below 30, it indicates
strong Bearish Momentum

How to trade with RSI Indicator

Before trading with any of the indicators, we must not forget to follow the golden rules of trading, and that is to apply the stop loss in every trade. And Profit booking in each trade must be according to the 2% principle of the Risk Reward Ratio.

If you want to enter the market for trade, you must use the proper timeframe based on your investment strategy. If you are trading with the timeframe of the Daily chart, we must also see the RSI levels in the weekly and monthly charts for greater accuracy. RSI levels between 50-70 in weekly and monthly charts indicate a strong bullish phase and you should enter the market. We must go for buy trade only when the market is in the Bullish phase and sell when in the bearish phase because we should not take trade against the trend.

Trading based on RSI Oscillation

A trader takes the help of the RSI indicator to assess the strength of the market while placing their orders in the stock market. There are some peculiar levels in the Indicator which decide a lot about the trading decision to be made.

When RSI oscillates between 30-70 level

When the RSI value touches the level of 30 and start raising it indicates a positive breakout, and here you can enter into the trade. When the RSI value crosses above 70 and starts its decline to lower levels it is an indication of a negative breakout. But before placing the order you must confirm the trend with other technical indicators like Moving Average Convergence Divergence (MACD) with RSI on the price chart.

When RSI oscillates between 50-100 levels

When RSI oscillates between the range of 50 to 100 that means it is an indication of a possible long bullish trend in the market. Here RSI generally makes its support at 50 and again bounces back to the upper side. This opportunity can be the best buying opportunity for a trader. If RSI crosses 70, it is the indication of an extremely bullish trend where the Bulls are in total control of the market. In this situation, we should not exit or take the Sell trade.

Trading with RSI indicator
Trading with RSI indicator

When RSI oscillates between 50-0 levels

When RSI oscillates between the range of 50 to 0 that means it is an indication of a possible long bearish trend in the market. Here RSI generally makes its resistance at 50 and again declines to the lower side. This opportunity can be the best-selling opportunity for a trader. If RSI crosses below 30, it is the indication of an extremely bearish trend where the Bears are in total control of the market. In this situation, we should not enter or take the Buy trade.

When RSI oscillates between 70-100 level

When RSI oscillates between 70 to 100, it indicates a strong bullish trend when RSI takes support at 70 and bounces back. As a trader, we should take a long position in this situation and remain in the trade to make a profit out of a strong bullish phase.

When RSI oscillates between 30-0 level

When RSI oscillates between 30 to 0, it indicates a strong bearish trend when RSI makes resistance at 30 and declines back. As a trader, we should keep ourselves away from taking a trade in this zone till any positive breakout.

Trading with RSI Formation

Trading with the formations is quite useful for a trader on the chart and double top and double bottom are among those formations. Here we are talking about trade with the formation of the RSI indicator and not the stock price formation on the chart. Here the formation of Double top and Double bottom will be visible over the RSI indicator movement.

RSI Double top and Double Bottom

Generally, Double top formation forms in the bullish phase at the upper level of the chart, while Double bottom is formed in the Bearish phase at the lower level of the chart. The shape of the Double top is like the word M while the Double bottom looks like W. When the RSI indicator makes a double top above 70 that means there are strong possibilities of trend reversal and a bearish trend may follow soon. But, If the RSI indicator makes a double bottom below 30 that means there are strong possibilities of trend reversal and a bullish trend may follow soon. Accordingly, a trader can decide his position and enter or exit the market.

Trading with RSI Divergence

Trading with the Divergence is becoming popular among traders because it acts as a leading indicator. Divergence happens when the price of the stock is following one trend but the technical indicator starts showing the opposite trend in the same time frame. Positive RSI divergence occurs when the price of the stock is going down but RSI suddenly starts showing an uptrend in the corresponding time frame. And if you spot any bullish candle on the chart in the divergence, that means a strong possibility of a bullish phase starting soon.

Negative RSI divergence occurs when the price of the stock is going up but RSI suddenly starts showing a downtrend in the corresponding time frame. And if you spot any bearish candle on the chart in the divergence, that means a strong possibility of a bearish phase starting soon. Accordingly, a trader can decide his position and enter or exit the market.

No need for confirmation if you are trading with RSI double bottom, double top or divergence because these are confirmations in themselves. 

Final Words

RSI is a great tool in the hands of a trader to improve his trading accuracy, but you should not blindly follow this. Because sometimes, the false signals generated by this tool can lead you to losses. To improve accuracy in your trade, you must use it with the other technical Indicators like Bollinger Band or MACD. It will help you precisely manage your trade and thereby minimise your losses.


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