The Relative Strength Index (RSI) is a momentum indicator developed by J. Welles Wilder to measure the magnitude of recent price changes and evaluate whether a stock or asset is overbought or oversold. The RSI is calculated based on average gains and losses over the past 14 periods. Wilder considered the RSI to be indicating an overbought condition when above 70 and oversold below 30. The RSI can remain in overbought territory for extended periods during an uptrend. Divergences between price and RSI can also provide trading signals. Proper testing of a trading plan is important when using RSI to ensure it is fully trusted.

1. Relative Strength Index
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Rajakrishnan M
Assistant Professor in Commerce CA
Fundamental and
Technical Analysis

2. Relative Strength Index – RSI
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Developed by J. Welles Wilder, the
Relative Strength Index (RSI) is a
momentum indicator that measures
the magnitude of recent price
changes to evaluate overbought or
oversold conditions in the price of a
stock or other asset.

3. Calculation
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Average Gain = Sum of Gains
over the past 14 periods / 14.
Average Loss = Sum of Losses
over the past 14 periods / 14

4. Overbought-Oversold
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Wilder considered
RSI overbought when the
indicator is above 70
and oversold below 30.
The RSI will rise as the
number and size of
positive closes increase,
and it will fall as the
number and size of
negative closes increase.

5. Overbought-Oversold
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6. As you can see in the chart, the RSI indicator can remain in
"overbought" territory for extended periods while stock is in an uptrend
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7. Momentum oscillators
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Despite this overbought reading, the stock did not
decline; instead, it stalled for a couple weeks and
then continued higher.
Three more overbought readings occurred before
the stock finally peaked in December (2).
Momentum oscillators can become overbought
(oversold) and remain so in a strong up (down)
trend.

8. Momentum oscillators
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9. Divergences
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10. RSI tends to fluctuate between 40 and 90 in a bull market (uptrend)
with the 40-50 zones acting as support.
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11. RSI tends to fluctuate between 10 and 60 in a bear market
(downtrend) with the 50-60 zone acting as resistance.
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12. Takeaway
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The biggest takeaway is to make
sure that you have fully tested
your trading plan when using the
relative strength index trading
indicator. It’s a lot of work but
without testing, you will never
fully trust your trading strategy
and will never allow it to reach
it’s full potential.

13. Trading Plan
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Identify the
Trend.
Look at
Moving
Average
Crossover.
Look at RSI
& MACD in
all time
frames.
Look at
candlestick
formation
all time
frames.
Support
and
Resistance
levels
Stop Loss
and Target

14. Analysis
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