Faq

Q. What is RSI?

Q. What is RSI?
A. RSI stands for Relative Strength Indicator.
RSI was developed by J. Welles Wilder. Relative Strength Index (RSI) is a momentum
oscillator that measures
1. The speed and change of price movements.
2. Strength of stock trend and helps to predict their reversals.

Q. How to calculate RSI of any particular stock ?

ANS-It already in all softwares of all brokers.

Q. How to use RSI to detect the Oversold /Overbought situations?

A. RSI value oscillates between 0 to 100.
As per Wilder,
RSI value is > 70: overbought
RSI is <30: oversold.

Dr Ram uses 80/20 values to define overbought and oversold. RSI above 80 is overbought and below 20 is oversold.
You can take contrarian position. E.g. If Stock is oversold you buy it. Trend may reverse and you can gain.
If Stock is overbought you sell it. Trend may reverse and you can gain.

Kindly note that stock may remain for long period in overbought state also and reversal
may not happen. Hence we need to use other indicators along with RSI.reversals.

Q. What is the meaning of oversold and over bought?

A. When share price drop suddenly it enters in oversold region. (RSI <20)
If share price increase suddenly it enters overbought region. (RSI >80)

Q. What is RSI Divergence?

A. A divergence is formed when
a. In a downtrend, RSI is making higher high and higher lows while price is making
lower high and lower lows.
b. In an upward trend, RSI is making lower high and lower lows while price is
making higher high and higher lows.

Q. How to differentiate false RSI divergence?

When you cant draw trendlines there is no divergence

Q. When to time to buy stocks using RSI?

A. First step is to identify which share you want to buy. If you are long term investor then
you must choose fundamental parameters like MPTDS..

  • Profit..Products etc.
  • Second step is the timing of buy.
  • RSI can generate signal .
  • Buy shares when they are in Oversold zone means RSI below 20..
  • If you make SIP double when stock is oversold then your return will be more

Q. What are the ideal average period and RSI period for RSI…. For long term and for short term?

A. Standard is 14.
If you use 20 days then RSI increase specificity which is good for long term investors

Q. Why is 14 day period taken as period for RSI? Can RSI be applied to a longer or shorter duration also? If no Why ? If yes how ?

A. Standard is 14.

  • If you use short (14), it create false positive..
  • If you use long (20), it reduce false positive signal for investors

Q. What is meant by higher high, higher low, lower high and lower low?

A. In uptrending market price goes higher high and higher low..
price goes up and up
These are just levels on graph which are self explanatory

Q. Are failure swings ( for trend reversals) of any importance for long term investors?

A. Not much

Q. Does RSI generate good signals in sideways market?

A. In trending market: Use Overlay indicators – Moving Average, Ichimoku, Supertrend and
BB
In sideway market : Use oscillators- RSI, Stochastics, MACD

Q. Is RSI a lagging indicator? So, is RSI useful to trader as well or only investor ?

No, RSI is not a lagging indicator. It is useful for BOTH traders and investors.
Traders and investors are same only difference is TIME frame.
Investor use EOD charts while traders use smaller timeframe charts depending on their
duration of trade.

Q. How many indicators are enough to confirm the trend ? Price action + Moving averages like RSI, MACD ? What is best combination?

The following indicators are useful to confirm trend:
Price action

  • 1 Overlay -MA , Ichimoku, Supertrend
  • 1 Oscillators-MACD, RSI, stochastic.
  • Don’t use too many indicators.
  • Master any 3 indicators and stick to it and master it.
  • Remember Dialogue of Akshay kumar in Chandani Chowk to China.
    “Do one thing which you practiced 10000 times.”

Q. What is best timeframe for intraday using RSI?

A. 1 min,5 min,10 min

Q. If we select good stock by MPTDS criteria but RSI is 40. Should we wait to come near 20/30 to buy?

A. Buy is better option.
Because Waiting needs patience and many times you miss opportunity.
Atleast you can buy some quantity at 40 and add more quantity when RSI goes <20/30.

Q. When using any level either 70:30 or 80:20 how to decide exact point when to buy or sell shares?

A. You need to look at market sentiments also.

  • If market become positive then you need not to wait for 80/20. You should act.
  • Market moves on Sentiments, News, Fundamentals, Political news, Global market and RBI.
  • Market is too complex and one indicator or one formula does not help.
  • Experience is very important.