30-Day Stock Market Series
Day 9 of 30
RSI: Know When a Stock is Overbought or Oversold
The Relative Strength Index (RSI) is the most widely used momentum oscillator. Day 9 teaches you to use it properly — and avoid the most common mistakes.
What RSI Measures
RSI measures the speed and magnitude of recent price changes to evaluate overbought or oversold conditions. It oscillates between 0 and 100.
RSI = 100 − [100 / (1 + RS)] where RS = Avg Gain / Avg Loss over 14 periods
The Classic Interpretation
Oversold Zone (RSI < 30)The stock has fallen hard and fast. A potential buying opportunity — but confirmation needed. Don't buy just because RSI hits 30.
Overbought Zone (RSI > 70)The stock has risen hard and fast. Consider taking partial profits or tightening stop-loss. Strong trends can stay overbought for weeks.
RSI Divergence: The Hidden Signal
This is where RSI becomes powerful for professionals:
- Bullish Divergence: Price makes lower lows, RSI makes higher lows → buyers gaining strength → potential reversal up
- Bearish Divergence: Price makes higher highs, RSI makes lower highs → sellers gaining strength → potential reversal down
import pandas as pd
def compute_rsi(series, period=14):
delta = series.diff()
gain = delta.clip(lower=0).rolling(period).mean()
loss = (-delta.clip(upper=0)).rolling(period).mean()
rs = gain / loss
return 100 - (100 / (1 + rs))
df['rsi'] = compute_rsi(df['Close'])
oversold = df[df['rsi'] < 30]
overbought = df[df['rsi'] > 70]
RSI in Strong Trends
Important NuanceIn a strong bull trend, RSI can stay between 50–80 for months. In a bear trend, it stays between 20–50. Adjust your overbought/oversold thresholds based on the trend regime.
RSI + Moving Average Combo
Best practice: use RSI as a filter, not a standalone signal. A stock above its 200 DMA with RSI pulling back to 40–50 = high-probability buy setup. RSI alone is not enough.
Today's Scan
Screen for Nifty 500 stocks where RSI is between 35–45 (pullback) AND price is above 200 DMA (uptrend). These are your best swing trade candidates.