RSI
Also written Relative Strength Index
A momentum oscillator scaled 0 to 100 that measures the speed and size of recent price changes — conventionally read as overbought above 70 and oversold below 30.
In plain language
RSI compares how much a share has gained on its up days with how much it has lost on its down days over a recent window, usually 14 periods, and expresses the result on a scale of 0 to 100.
A high reading means the recent move has been overwhelmingly upward — the share has risen fast and far. A low reading means the opposite. It measures momentum, the pace of a move, not its direction or its correctness.
How it works
The standard thresholds are 70 and 30. Above 70 the share is called overbought; below 30, oversold.
The word "overbought" is misleading and the workbook is careful about it. It does not mean the share is expensive or due to fall. A share in a powerful uptrend can hold an RSI above 70 for weeks while continuing to rise, and selling on the first reading above 70 in such a trend is a reliable way to exit early.
The more useful signal for most analysts is divergence: price makes a new high while RSI makes a lower high. The move is continuing but with less force behind it each time, which often precedes a reversal.
The formula
RSI = 100 − [ 100 ÷ (1 + RS) ]
RS = Average gain over n periods ÷ Average loss over n periods
n is 14 by default. A shorter period makes the indicator more sensitive and noisier.
A worked example
A metals share over 14 trading sessions: 9 up days averaging +1.8%, 5 down days averaging −1.2%.
Average gain = (9 × 1.8) ÷ 14 = 1.157
Average loss = (5 × 1.2) ÷ 14 = 0.429
RS = 1.157 ÷ 0.429 = 2.70
RSI = 100 − [100 ÷ (1 + 2.70)] = 100 − 27.0 = 73.0
At 73 the share is technically overbought.
What happens next depends on context. In a strong sector uptrend it may stay above 70 for a month. But if over the following three weeks the price makes a new high at Rs 512 while RSI peaks at 68, below its earlier 73, that is bearish divergence — the second leg up was driven by less buying pressure than the first, and the odds of a pullback have risen.
Why NISM asks about it
Chapter 15 covers RSI among the momentum indicators. Questions are usually definitional — the scale, the two thresholds, what overbought and oversold mean — rather than computational.
Common exam traps
- RSI is bounded 0 to 100. Any option offering a value outside that range is wrong.
- Overbought does not mean sell. It means the recent move has been strong. In a trending market the condition can persist for a long time.
- 70 and 30 are conventions, not laws; some analysts use 80/20 in strong trends.
- RSI is a lagging, price-derived indicator — it can only describe what has already happened.
- Do not confuse Relative Strength Index (one share against its own history) with relative strength comparison (one share against an index or another share). Different tools, similar names.
Check yourself
1.In a strongly trending bull market, an analyst notices the RSI has been holding between 46 and 78 for several months. Which reading is consistent with the workbook?
- a)The RSI has malfunctioned, since it should oscillate around 50
- b)Every reading above 70 was a sell signal that failed
- c)This is normal — in a bull market the RSI rarely falls below 44–45 and can remain overbought for a long period
- d)The stock must be in a trading range, which is where RSI works best
Show the answer
Answer: (c) This is normal — in a bull market the RSI rarely falls below 44–45 and can remain overbought for a long period
The workbook gives both halves of this answer explicitly. In a bull market the RSI value will rarely fall below 44–45 levels, and the RSI can remain overbought (70 and above) for a long period of time in a strongly trending bull market.
Option B is the single most expensive misreading in this chapter: overbought is not an instruction to sell in a trending market. Option D inverts the workbook’s own guidance — RSI performs well in a market which is in a trading range, which means it is least dependable in exactly the strong trend described here.
Mirror the numbers for the downside: in a bear market the RSI will rarely rise above 50–55, and it can stay oversold (30 and below) for a long stretch.
2.Which of the following is NOT a tenet of the Dow Theory?
- a)The market discounts everything
- b)The market has four trends
- c)The averages must confirm each other
- d)A trend remains in effect until a clear reversal occurs
Show the answer
Answer: (b) The market has four trends
Dow Theory says the market has three trends — primary, secondary and tertiary — not four. This is the workbook’s own sample question, and the number is the whole trick.
The other three options are genuine tenets. "The market discounts everything" is the first tenet; "indices must confirm each other" is the fourth, requiring both Nifty and Sensex to move in the same direction; and "trends persist until a clear reversal" is the sixth.
Keep the counts together: six tenets, three trends, three phases, five assumptions.
3.Which statement about moving averages is consistent with the workbook?
- a)Moving averages are leading indicators that anticipate turns before price
- b)Moving averages are lagging indicators but are very useful in identifying major trends
- c)A moving average is calculated from the highest price of each period
- d)Moving averages should only ever be used on intraday charts
Show the answer
Answer: (b) Moving averages are lagging indicators but are very useful in identifying major trends
The workbook states it plainly: MAs are lagging indicators but are very useful in identifying major trends.
Option A inverts this. The chapter’s leading candidates are elsewhere — the MACD "at times serves as a leading indicator", and the RSI "can be a lead indicator".
Option C is wrong on the input: a moving average is "the average of daily or weekly or monthly closing prices". Option D contradicts the chapter, which uses the 50 and 100 DMA for primary trends and recommends that monthly, weekly and daily MAs all point the same way before you trust a trend.
Where this is taught
Free preparation for NISM Series XVRelated terms
- ChannelTwo parallel trendlines enclosing price — one along the highs, one along the lows.
- Moving averageThe average price of a share over a rolling window, recalculated each session — it smooths away daily noise so that the underlying trend, and changes in it, become visible.
- Support and resistancePrice levels where a move tends to pause or reverse — support where demand concentrates and forms a floor, resistance where supply concentrates and forms a ceiling.