How do the ATR and RSI indicators complement each other in intraday trading in the Indian stock market?
Great question! The combination of Average True Range (ATR) and Relative Strength Index (RSI) can
offer a powerful synergy for intraday traders, especially in the volatile Indian stock market. Here’s
how:
Individual Roles:
● ATR (Average True Range): ATR primarily measures market volatility. In a fast-moving market
like India’s NSE or BSE, a high ATR value often signals potential breakout or breakdown
scenarios.
Example: If TCS has an ATR value of 30, it means the stock is likely to move ₹30
either up or down.
● RSI (Relative Strength Index): RSI is a momentum oscillator that measures the speed and
change of price movements. RSI oscillates between zero and 100, and traditionally, a level
above 70 indicates overbought conditions, whereas a level below 30 signifies oversold
conditions.
Example: If Infosys has an RSI of 75, it could mean that the stock is potentially
overbought.
Combination Strategy:
● Filtering Out Noise: Use ATR to filter out price movements that are insignificant.
Anything below a certain ATR value could be considered ‘noise’ and thus can be
ignored.
● Identifying Momentum with RSI: Once you have a shortlist of stocks with significant
price movement (thanks to ATR), use the RSI to identify if the stock is in an
overbought or oversold condition.
| Stock Name | ATR Value | RSI Value | Condition |
|---|---|---|---|
| TCS | 30 | 75 | Potentially Overbought |
| Infosys | 25 | 20 | Potentially Oversold |
Entry and Exit Points: Use the two indicators in tandem for pinpointing entry and exit points.
● Entry: A low RSI value (<30) with a rising ATR could be a buying signal.
● Exit: A high RSI value (>70) with a dropping ATR might be a selling cue.
Risk Management: ATR can also be useful for setting your stop-loss levels, while RSI can be used to
trail your stop losses once you’re in a profitable position.
Example:
● Stock: Reliance Industries
● ATR Value: 40
● RSI Value: 28
● Action: The stock shows high volatility (ATR=40) and is potentially oversold (RSI=28). This
could be an ideal setup for a long position, with the ATR value helping to set a stop-loss at
around ₹40 below your entry point.
Remember, the key to successful trading is not just identifying opportunities but also managing your
risks effectively. No indicator is foolproof, so always ensure to use proper risk management
strategies.
Hope this helps, happy trading!
Disclaimer: This answer is for educational purposes only and should not be considered as financial
advice.