How to Use RSI Indicator in Trading

1. TECHNICAL ANALYSIS MODULE 3
❑ TECHNICAL INDICATOR : RELATIVE STRENGTH INDEX (RSI)
➢ RSI IS LEADING INDICATOR AS WELL AS AN OSCILLATOR.
➢ RSI IS USED TO IDENTIFY THE OVERBAUGHT AND OVESOLD ZONES OF ANY STOCK.
➢ ONE CAN LOOK FOR BUYING OPPORTUNITIES WHEN STOCK IS IN OVERSOLD ZONES.
➢ SIMILARLY ONE CAN LOOK FOR SELLING OPPORTUNITIES WHEN STOCK IS IN OVERBAUGHT ZONE.
➢ BUT DURING STRONG TREND RSI MAY REMAIN IN OVERBAUGHT OR OVERSOLD ZONE FOR EXTENDED PERIOD.
➢ RSI RANGES FROM 0 TO 100 WHERE
➢ BELOW 40 IS CONSIDERED AS OVERSOLD ZONE
➢ 40 - 60 IS CONSIDERED AS SIDEWAYS ZONE
➢ ABOVE 60 IS CONSIDERED AS OVERBAUGHT ZONE
➢ FOR BUYING OR SELLING OPPORTUNITY FIND CANDLESTICK PATTERN, CHART PATTERN OR DIVERGENCE IN SAID ZONES.
➢ DIVERGENCE CAN BE USED TO TAKE POSITIONS IF OBSERVED IN OVERBAUGHT OR OVERSOLD ZONES.
➢ DIVERGENCE - A DIVERGENCE IS WHEN THE PRICE OF AN ASSET MOVES IN THE OPPOSITE DIRECTION OF A TECHNICAL INDICATOR.
THERE ARE TWO TYPES OF DIVERGENCES.
➢ BULLISH DIVERGENCE
➢ BEARISH DIVERGENCE

2. TECHNICAL ANALYSIS MODULE 3
➢ BULLISH DIVERGENCE –
➢ A BULLISH DIVERGENCE IS OBSERVED WHEN THE PRICE OF AN ASSET MAKES A LOWER LOW (i.e. IN DOWNTREND) AND RSI MAKES A HIGHER LOW
(i.e. IN UPTREND)
➢ IF BULLISH DIVERGENCE IS OBSERVED IN OVERSOLD ZONE, THEN STRONG UPMOVE IS POSSIBLE.
➢ BEARISH DIVERGENCE –
➢ A BEARISH DIVERGENCE IS OBSERVED WHEN THE PRICE OF AN ASSET MAKES A HIGHER LOW (i.e. IN UPTREND) AND RSI MAKES A LOVER LOW (i.e. IN
DOWNTREND)
➢ IF BEARISH DIVERGENCE IS OBSERVED IN OVERBAUGHT ZONE, THEN STRONG DOWNMOVE IS POSSIBLE
PRICE
RSI
PRICE IS MAKING LH-LL BUT RSI IS MAKING HH-HL
THIS IS CALLED BULLISH DIVERGENCE
DIVERGENCE SHOULD OCCURE IN OVERSOLD ZONE i.e. BELOW 40
PRICE
RSI
PRICE IS MAKING HH-HL BUT RSI IS MAKING LH-LL
THIS IS CALLED BEARISH DIVERGENCE
DIVERGENCE SHOULD OCCURE IN OVERBAUGHT ZONE i.e. ABOVE 60

3. TECHNICAL ANALYSIS MODULE 3
❑ TECHNICAL INDICATOR : RELATIVE STRENGTH INDEX (RSI)
➢ AS CAN BE SEEN BELOW WE CAN SEE SELLING OPPORTUNIY IN OVERBAUGHT ZONE
➢ AND BUYING OPPORTUNIY IN OVERSOLD ZONE WITH HELP OF CANDLESTICK PATTERNS.

4. TECHNICAL ANALYSIS MODULE 3
❑ TECHNICAL INDICATOR : RELATIVE STRENGTH INDEX (RSI)
➢ AS CAN BE SEEN BELOW WE CAN SEE SELLING OPPORTUNIY IN OVERBAUGHT ZONE
➢ AND BUYING OPPORTUNIY IN OVERSOLD ZONE WITH HELP OF CANDLESTICK PATTERNS.

5. TECHNICAL ANALYSIS MODULE 3
❑ TECHNICAL INDICATOR : RELATIVE STRENGTH INDEX (RSI)
➢ AS CAN SEEN BELOW RSI CAN STAY IN OVERBAUGHT ZONE FOR EXTENDED TIME DURING STRONG TREND.
➢ SO INSTEAD OF FINDING SELLING OPPORTUNITIES WE SHOULD BE FINDING BUYING OPPORTUNITY IN OVERBAUGHT ZONE.

6. TECHNICAL ANALYSIS MODULE 3
❑ TECHNICAL INDICATOR : RELATIVE STRENGTH INDEX (RSI)
➢ BELOW IS THE EXAMPLE ON HOW DIVERGENCE CAN BE USED.

7. TECHNICAL ANALYSIS MODULE 3
❑ TECHNICAL INDICATOR : RELATIVE STRENGTH INDEX (RSI)
➢ BELOW IS THE EXAMPLE ON HOW DIVERGENCE CAN BE USED.