📚 Stock Market Glossary

Clear, beginner-friendly explanations, real-world analogies, and visual formulas for key stock market terminology.

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RSI (Relative Strength Index)

Trading & Market

💡 Key Takeaway: A momentum oscillator measuring the speed and change of price movements on a scale from 0 to 100 to identify overbought and oversold conditions.

Thermometer Analogy: If 36.5°C is body temp, RSI over 70 is a burning fever of 40°C (needs cooling down), while RSI below 30 is hypothermia (ready for a warm recovery)!

😎 10-Second Show-off Pro Tip for Friends!

😎 Show-off Tip: Say, 'Don't FOMO buy just because a stock hits all-time highs! Check if 14-period RSI is above 70—entering during extreme overbought territory is how retail traders buy the top!'

📖 Beginner-Friendly Explanation

STEP 1

Core Concept & Meaning

RSI is a premier technical momentum indicator that quantifies the velocity and magnitude of recent price changes to evaluate overbought or oversold asset conditions.

Standard calculations evaluate a 14-period lookback window. By calculating the ratio of average gains to average losses over those 14 trading sessions, RSI generates a index value bounded between 0 and

STEP 2

Why It Matters & Mechanism

100.

• RSI ≥ 70 (Overbought): Indicates that aggressive buying momentum has pushed asset valuations into overextended territory, raising the probability of a pullback or price consolidation.

RSI ≤ 30 (Oversold): Signals that severe selling pressure has pushed valuations into deeply discounted territory, creating conditions ripe for a technical bounce.

STEP 3

Practical Investment Tips & Pitfalls

Technical analysts pay close attention to RSI Divergence—where stock prices hit new highs while RSI fails to confirm—as an early warning signal of momentum exhaustion.

📊 RSI calculation formula and key trading sections

RSI = 100 - [100 ÷ (1 + RS)] (where RS = 14-day average increase ÷ 14-day average decrease)

▶ RSI ≥ 70: Overbought (consideration to sell / profit-taking zone) ▶ RSI ≤ 30: Oversold (consideration to buy / technical rebound point)

⚖️ Key Comparison at a Glance

Category	Overbought zone (RSI above 70)	Neutral range (RSI 30–70)	Oversold zone (RSI below 30)
Buying/selling forces	Buying price is extremely overheated and greedy	Buy/sell power balance	Sell-off, sell-off and panic
Stock price position	After a short-term surge, the report is close	Box range or daily trend progress	New low/bottom after continued decline
Trading response	Refrain from making new purchases, realize profits from split sales	Following existing trends (wait and see)	Split purchase RBI monitoring (for rebound)

📌 Practical Market & Real-World Example

When a mega-cap tech stock surged prior to earnings pushing its RSI to 78, profit-taking drove a pullback despite strong beating-earnings numbers.