Hey guys, this is Manik here. In today's video, we will know about the RSI indicator.
Before this, we will discuss what are indicators so that you get a better understanding of the RSI indicator.
Finally, we will know about RSI and how we can use it potentially in our trading. We will discuss all these.
So let's start the video without any further delay.
So guys, what are indicators? Indicators, as the name suggests, indicate possible price movement.
The stock chart which you are seeing and if the indicator is saying to buy that doesn't mean the price will go up only.
Sometimes the signal given by the indicator may fail and the stock price may fall.
So this is a possibility which you should know that 100% possibility does not exist in the stock market.
Indicators are of 2 types. The first is the Lagging Indicator and the second is the Leading Indicator.
Let's take an example to make it easy to understand indicators. Let's take the example of the Lagging indicator.
Suppose a stock price is at Rs.50 and it goes up Rs.100. The stock doubled with 100% returns to investors which is good.
But selling is necessary to realize the profit. Let's say it is following a lagging indicator.
The lagging indicator won't give a signal at 100 but maybe when the price comes to 70
then it can give a signal that maybe it's time to sell the stock.
So the Rs.30 profit that the investor missed is because of the lagging indicator.
Keep in mind that the lagging indicator gives accurate signals compared to the leading indicator.
What are leading indicators? Let's take the example of leading indicators. Let's say the price goes from Rs.50 to Rs.100.
Let's take the same example. Then there may be the leading indicator that may indicate to sell the stocks as price may fall.
But in the leading indicator case, the price may go up from Rs100 to 150 as well. This is a possibility.
What is the major difference between the lagging indicator and the leading indicator?
First is that the lagging indicator gives late signals whereas the leading indicator gives early signals.
The second is that lagging indicators give accurate signals when compared to leading indicators. This was about indicators.
Let's move on to RSI and its use. RSI is a leading indicator which means that you will get less accurate results but early signals.
Sometimes the signal may fail but you will get early signals. This may be beneficial for you.
RSI's best use can be seen in the sideways market. When the sideways market is going on, you will get great results by using RSI.
What do we do with RSI? We make overbought and oversold zones i.e, RSI ranges from 0 to 100 levels.
Considering 30 and 70 levels are zones to watch out for. When RSI goes above 70 levels, that is considered an overbought zone.
Prices may come down as stocks become quite expensive. When RSI comes below 30 levels, the stock has become cheap
and we can buy the stocks. Let's go to my laptop screen and we see the use of RSI in our trading.
This is Reliance's daily chart and I have plotted the RSI. RSI is showing 14. So RSI 14 means what? I will tell you.
RSI 14 means comparison is from 14 days. Let's select a random candle and let's take this big candle.
Overbought and oversold situations we will talk about will be compared to the last 14 candles.
That is the comparison of overbought or oversold will be compared to the last 14 candles.
If you are seeing daily candles, it will be compared to the last 14 days. If you are seeing hourly candles,
it will be compared to the last 14 hours. I hope this was clear. You can experiment with 14 levels or 20 or 50.
How to use RSI in a traditional sense? Above 70, the price is expensive and stock might come down.
Here we can see that when Reliance goes above 70 and comes back below 70 levels, this is an overbought scenario.
When it comes below 70 levels, a down move may come in stock. On this day, the 29th,
we can signal that RSI has gone back below 70 levels. Around 67-68, it came. It is a red flag and
you should be worried about the stock as the stock may have become too expensive. Downmove is possible in the stock.
You can see a down move in the next 2-3 days. You can say it has come to 2000 levels from 2100.
This is around a 4-5% down move in the stock. Let's talk about the oversold situation.
How we can play it out, we will discuss. In the same chart, you can see the Reliance example.
When RSI came below 30 levels, you can see it from the highlighted area, grey area, and went above 30 levels,
you can see the bullish indication.
Maybe a bullish move can come. You can see a strong candle, a bullish candle. RSI has also come around 33.
You can expect an up-move in this area as stock is oversold. Price may increase. So guys these were two uses. I will repeat.
When the price comes above 70 levels and comes down below 70, you can consider selling the stocks. As the stock has become expensive.
Likely, on the downside, when stocks are oversold, then you can consider buying stock as the stock has become cheap.
RSI has 2 more uses which I want to discuss. If a stock is at 70 or 100 levels for a long time, then an uptrend is a very fearful subtrend.
Then you can consider buying despite selling. Let me repeat. When RSI stays constant between 70 and 100 for a long time,
you can consider buying the stock and not sell. This means the expensive stock is becoming more expensive.
You can expect it to become more expensive till it comes below 70. This is my 3rd use.
The other use is that if RSI is constant below 30 levels or 0-30 levels, the stock might become cheaper.
You can consider short-selling of stocks. We will see this example to make it easier. Do you see 2 more examples where 1 is a failure example?
When the nifty went above 70 levels, around this area and came below 70, it is a trigger to short sell or sells the stocks.
What happened here exactly? The signal failed and we saw an up move.
But the good thing is that RSI came back to 70 and remained constant for 3-4 days.
What you can do is with this all-time breakout, you can consider buying the stock. Why?
Because if the stock is above 70 for some time, the stock might become more expensive.
If you buy a stock at this level, you get a good trend here. Same way, let's look at an example where the stock price is falling.
What can you see here? Nifty levels became below 30 levels and coming out of 30 levels, it is considered a good buying opportunity.
You can see on 3rd March, RSI came back above 30 levels and you should consider it as an opportunity. But this signal failed.
There was a breakdown and for a few days, RSI remained below 30 levels. What can you do here?
Maybe in this candle or this, you can consider short selling.
Why? Because your first signal failed and for 2-3 days, the price is sustaining below 30 RSI.
This means the price may become cheaper. You can consider short selling as you can benefit from a down move.
Guys always remember that you don't have to buy below 30 levels and sell above 70 levels
as RSI may remain in that area for a long time. You need to buy when RSI comes out of 30 levels.
You can see on this date, 25th March, RSI came above 30 levels. This was a great buying opportunity
as it became a bottom and the price moved up significantly. On the upside, remember when RSI comes below 70 levels,
then you should consider selling the stocks, not before that. Because stock may remain above 70 levels
for a long time and the stock might become more expensive. So these were 4 uses of RSI.
We learned how to identify overbought and oversold zones and if a stock is overbought for a long time
then we may think of buying and not selling. If a stock is oversold for a long time then we think of a short sell.
You can experiment always and not remain constant at 70 and 30 levels. You can try 60 and 40 levels.
In the same way, we saw 14 days, you can test 20 days or 50 periods. You should always keep experimenting in trading
and see what works for you the best. If you liked this video, make sure to smash the like button below.
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