RSI Myths: Overbought vs Oversold
The Relative Strength Index (RSI) is the most misunderstood indicator in trading history.
The Classic Mistake
"RSI is above 70, so market is Overbought. I should SELL."
"RSI is below 30, so market is Oversold. I should BUY."
WRONG. In a strong trending market, RSI can stay above 70 for days while the price keeps rocketing up. Selling at RSI 70 in a bull market is suicide.
The Correct Interpretation
- RSI > 60: Bullish Zone. Buyers are in control. Look for Buy dips.
- RSI < 40: Bearish Zone. Sellers are in control. Look for Sell rises.
- RSI 40 - 60: No Trading Zone (Sideways/Chop).
RSI Divergence
This is the only time RSI signals a reliable reversal.
Bearish Divergence: Price makes a Higher High, but RSI makes a Lower High. Momentum is fading. Reversal likely.
*Disclaimer: NSE/BSE frequently revise Lot Sizes and Expiry Days (e.g., SEBI Circulars 2024/2025). Always check the latest circular on nseindia.com before trading.
Standard Disclosure: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. The content provided here is for educational purposes only and does not constitute financial or investment advice. AlgoStraddle Academy is not a SEBI registered investment advisor. Trading options involves high risk and capital can be lost.