Relative Strength Index ( RSI ) is a technical analysis indicator developed by J. Welles Wilder among others like Average Directional Index (ADX), Average True Range (ATR) and Parabolic SAR.
It is one of the most widely used indicators, after Moving Average.
The objective of RSI indicator is to measure the change in price momentum.
The textbook ranges for this banded indicator is 70-overbought zone and 30-oversold zone.
However, in practice, the zones are not fixed for all market types.
The phenomenon of ‘Range Shift’ explains that in a bull market RSI oscillates in the range of 30 to 75-80.
It refrains from crossing below 30, and any stock which is in a correcting phase and turns upward from 30 without breaching it, give a very good buy-on-dips opportunity.
On the other hand, when a stock is in a bear phase then it oscillates in the range of 20 to 60.
When slipping, RSI refrains from crossing above 60 almost absolutely and on the downside may even touch levels of 15-17. In such a scenario, sell-on-rallies is a good strategy.
Want to know more about the basics of RSI? Watch the video below:
Keep in mind that Technical Analysis has a ‘fractal’ nature.
This means, what we observe on a chart of say the daily or the weekly period, can be observed on the intraday charts as well.
If you want to know more about the use of RSI in Technical Analysis, enroll in NSE Academy Certified Technical Analysis course on Elearnmarkets.
Similarly, the Range Shift phenomenon can be observed on daily charts for securities which trend in a direction for months, or on the intraday charts for a security witnessing a counter-trend movement temporarily.
This Range shift can be observed on the intraday chart of Nifty below.
The 15 mins chart captured on the 2nd of February, 2016, shows that while Nifty was trending lower, RSI was oscillating in the lower range of 20 to 65.
( Note: the limit of ranges vary as per the period being observed ), whereas when Nifty started heading high from point ‘A’ onwards, RSI indicator shifted upwards and started oscillating in the range of 35 to 80.
In the last minute, as I finish writing this article, Nifty has again taken the plunge and the lower limit of the RSI current range of 35 has been breached, closing Nifty at a loss of 115, with RSI at 23.03.
Based on this article, I hope you will be able to make informed and better-planned decisions.
Like other technical indicators, RSI should be used in conjunction with other technical indicators in order to generate better trading signals.
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