#RSI is a common indicator which most of us use in the stock market.

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Also, an investment strategy is shared using RSI in the end.


Setup 1:

RSI- commonly used to show whether price is overbought or oversold.

General rule:
๐‘๐’๐ˆ > ๐Ÿ•๐ŸŽ -- ๐Ž๐ฏ๐ž๐ซ๐›๐จ๐ฎ๐ ๐ก๐ญ
๐‘๐’๐ˆ < ๐Ÿ‘๐ŸŽ -- ๐Ž๐ฏ๐ž๐ซ๐ฌ๐จ๐ฅ๐

One becomes cautious once price becomes overbought and optimistic when price becomes oversold.

Let's understand this with an example of Laurus Labs:

1. It was in overbought zone and after a few days when a small dip was seen from 693 to 588 (15% downside)

2. It was in oversold zone and after a few days when a small rally was seen from 59 to 107 (82% upside)

Well, this looks very easy, but it is not.

When a price is in overbought zone and is in momentum, then it can move up without taking a dip and exiting or shorting stock would prove wrong.

When IRCTC was in overbought zone, price went up from 2718 to 6396 (135% rally).

Similarly, for oversold stock.

When a price is in oversold zone and is crashing, then it can move down without taking an upmove and buying stock would prove wrong.

When DHFL was in oversold zone, price went down from 126 to 11 (91% crash).

What's the way of trading this then?

If a price is oversold, then wait for the price to turn towards neutral zone and also check on other setup whether support is available or not.
Other setup can be Price Action, Support Lines, Demand Zones, Fibonacci or any indicators.

If a price is overbought, then wait for the price to turn towards neutral zone and also check on other setup whether resistance is available or not.

Combine multiple setup for high probability trades.

Setup 2: Divergence

Another popular use of RSI by the traders.

Two types of Divergence:
1. Bullish Divergence
2. Bearish Divergence

Divergence is used by the traders who like to take contra trade (i.e. trade against the actual trend)

Bullish Divergence:

1. Price should form lower lows
2. RSI should form higher lows and in oversold region

Laurus Labs weekly chart- Bullish Divergence.
It went up from 450 to 740 (60% rally)

Bearish Divergence:

1. Price should form higher highs
2. RSI should form lower highs and in overbought region

Neuland Labs weekly chart- Bearish Divergence.
It went up from 2725 to 1500 (45% correction)

Based on divergence, then can be multiple divergence formed one after the other.

Like two bullish divergence in continuation or two bearish divergence in continuation.
This can be high probable trade setup.

One double bearish divergence is shown in the chart below.

Final Setup: Using RSI for investment.

Simple setup for long-term investment.

1. Select Fundamentally good companies
2. Use monthly time frame
3. Buy if RSI is above 50 on monthly closing basis
4. Sell if RSI goes below 50 on monthly closing basis.

Let's check charts now.

Asian Paints Monthly Chart.

Condition got satisfied in 2008 when it was trading at 108 and still after 13 years exit condition is not fulfilled in Asian Paints.

CMP is 2982.

Returns of 2660% times in 13 years or 29% CAGR.

Easy right!

Another example of Deepak Nitrite.

RSI crossed above 50 in 2012 when it was trading at 18.
And RSI crossed below 50 in 2016 and the exit was at 56.

Returns of 210% in four years which means CAGR of 33%.

Strategy is easy only if one follows all the rule.
Key point is to sit with the patience for the returns.

As quoted by Livermore: "Sit tight when you are Right"

50 is just a random number in investment strategy and one can select their own number for entry and exit.

I hope everyone got a feel of how RSI can be used.

These are not a universal rules one must follow. One can create their rule or follow someone else rules.

Only important thing is one must follow a fix rule instead of tweaking or changing setup frequently.


More from Yash Mehta

#RS is an indicator which helps in finding strong stock or index in the market.

This learning thread would be on
"๐™๐™จ๐™š๐™จ ๐™ค๐™› ๐™๐™š๐™ก๐™–๐™ฉ๐™ž๐™ซ๐™š ๐™Ž๐™ฉ๐™ง๐™š๐™ฃ๐™œ๐™ฉ๐™"

Shared some strategy.

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Most of us would confuse it with Relative Strength Index (RSI) but Relative Strength is a different indicator.

We have already covered about "Uses of RSI" in below thread๐Ÿ‘‡

One can go through this if you haven't.


Now coming to Relative Strength (RS).

It is basically a strategy used in momentum investing which shows strength or weakness between two asset classes (two stocks, index, commodity).

One can read about this in below

As of now, I am using this indicator on [email protected] platform.

It's free and one can add it in their Tradingview account as well, using this link๐Ÿ‘‡

There are multiple variants in this as well. Some traders use multiple time frame RS.


RS basically compares returns of one stock/index with the returns of benchmark stock/index at a particular time horizon.

Let's say, I want to analyze TCS and Benchmark Index is Nifty.


More from Screeners

One of the most successful stock trader with special focus on cash stocks and who has a very creative mind to look out for opportunities in dark times

Covering one of the most unique set ups: Extended moves & Reversal plays

Time for a ๐Ÿงต to learn the above from @iManasArora

What qualifies for an extended move?

30-40% move in just 5-6 days is one example of extended move

How Manas used this info to book

Post that the plight of the

Example 2: Booking profits when the stock is extended from 10WMA

10WMA =

Another hack to identify extended move in a stock:

Too many green days!

Time for a new thread on the possibilities I am looking for.
Do read it completely to understand the stance and the plan.

1. The moving average structure - Many traders just look at the 200 ma test or closing above/below it regardless of its slope. Let's look at all the interactions with 200 ma where price met it for the first time after the trend change but with 200 ma slope against it

One can clearly sense that currently it is one of those scenarios only. I understand that I might get trolled for this, but an unbiased mind suggests that odds are highly against the bulls for making fresh investments.

But markets are good at giving surprises. What should be our stance if price kept on rising? Let's understand that through charts. The concept is still the same. Divergent 200 ma and price move results in 200 ma test atleast once which gives good investment opportunities.

2. Zig-Zag bear market- There are two types of fall in a bear market, the first one is vertical fall which usually ends with ending diagonals (falling wedges) and the second one is zig zag one which usually ends with parabolic down moves.

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