What is the RSI?
RSI stands for Relative Strength Index and is an oscillating indicator that puts stock price movements into a temporal relation. With the help of the RSI indicator, an overview of the current market situation can be gained, and a quick assessment can be made of whether a stock is currently more "overbought" or "oversold".
The RSI indicator always has a value between the two extremes of 0 (completely oversold) and 100 (completely overbought). Accordingly, an RSI value of over 50 indicates an uptrend (bull market), and an RSI value below 50 indicates a downtrend (bear market). Depending on the definition, a stock is considered "overbought" above a value of 70 and "oversold" below a value of 30.
How you can profit from the RSI indicator in trading
The basic theory of the indicator is that an overbought stock (RSI value above 70) is saturated, and therefore, the probability of a market correction in the form of a trend reversal is high. The opposite behavior is present in the oversold signal, and the probability that the stock will begin to rise again increases.
Therefore, it can be simplified that a short position should be opened at a high RSI value and a long position at a low RSI value. However, trades and trading decisions should never be made only based on one indicator.
When using the RSI indicator on common charting platforms, the period length can usually be adjusted. Normally, a period of 14 is selected, which means that the closing prices of the last 14 candles in the chart are taken to calculate the value. The shorter the set period, the more volatile the indicator is, and therefore, it triggers signals more frequently. With a longer period, fewer signals are triggered.