RSI is the widely used and mostly debated indicator in the history of technical analysis.


Hello Traders

I hope you are trading well.........

Image - Self designed on Canva pro

Relative Strength Index (RSI) is one of the famous indicators used in the technical analysis of the trading world. This is invented by J. Welles Wilder in 1978 and most typically used on a 14-day timeframe.

Below are the two important parameters of RSI which will be used by Traders to take the trades:

1) Overbought and Oversold conditions (30 and 70 rule)

2) Bullish and Bearish Divergences

As per traditional definition, any RSI movement above 70 is considered as an Overbought condition, and hence many people advice to sell the stocks.

Similarly, when the RSI movement below 30 is considered as an Oversold condition and people advise to buy at this level.

However, both ‘Overbought’ and ‘Oversold’ is not a good idea to take trades. Because in a trending environment, RSI can stay in overbought and oversold regions for many days (sometimes weeks and months). You will lose money if you take trades in these situations.

Image - RSI stayed above 70 in uptrend

Image - RSI stayed below 30 in downtrend

Similarly RSI bearish divergence or bullish divergences are not a good idea to take trades.

Because, in an uptrend RSI can show successive bearish divergences and in a downtrend RSI can show successive bullish divergences.

Image - Failure of RSI Bearish Diverence in Uptrend

Image - Failure of RSI Bullish Diverence in Downtrend

Right way of using RSI

RSI Hidden divergences (Bullish and Bearish) are the best way to take trades because of the below reasons:

- Trades will be in the direction of trend

- Success ratio is better as compared to conventional RSI divergence

- Good Risk-Reward as a trend can continue at higher levels.

Image - RSI Hidden Bullish and Bearish Divergences

Above image shows the formation of both Hidden Bullish and Hidden Bearish Divergences. We can see some charts which show these hidden divergences and we will also see the results.

Image - Maruti chart showing Hidden bullish divergence

Image - Ceat Ltd chart showing Hidden Bullish Divergence

Image - Nifty chart showing Hidden Bearish Divergence

Image - Yes bank chart showing Hidden Bearish Divergence

If you look at all the above charts, hidden divergences occur in the direction of the trend. Taking trades after hidden divergence is a good idea (in addition to any other confirmation like candlestick confirmation or MA confirmation etc) than taking trades on the normal divergences.

I hope this detailed information helps!

Source - Trade and Grow Rich book.