RSI, Relative Strength IndexThe Relative Strength Index, of a stock is calculated by separating the upwards moves from the downwards moves, and taking the exponential moving average of each. We EMA of the upwards movements by the downwards movements calling this the relative strength, and plot this figure as a percentage by plot 100-100/ 1+RS).
The relative strength thus compares the number and strength of the up days to the down days. When the RSI is above 70, the market is said to be overbought, and due for a pullback, while when the RSI is below 30, the market is said to be oversold and due for a pullback.
The typically way to trade RSI, so to go long when the RSI is below 30 and then moves above it, or when a RSI forms a higher low than its last below 30.
Similar we can go short, when the RSI is above 70, and fall below it, or when RSI forms a lower high than its last above 70.