RSI stands for relative strength index. RSI is a very popular technical indicator that is often used by traders and investors to guage the market or a particular stock or security to find if it is oversold or overbought. It is also used to analyze trend reversals and pull backs. RSI was invented by J. Welles Wilder Jr who is also responsible for various other technical indicators such as Average True Range, Average Directional Index, and Parabolic SAR. RSI measures the speed and change of price and is a momentum oscillator.
How to use the RSI indicator
Most charting software has RSI indicator. RSI draws a line graph usually below the main chart. When the value of RSI is above 70 it is considered to be in the overbought zone and there is a possibility* of price going down. Similarly if the value is below 30 it is considered to be in oversold levels and there is a possibility* of price going up. The center that is 50 is considered to be the mid baseline.
If you feel like a new trend is about to form, look at the RSI. When a new uptrend is being formed RSI above the 50 baseline can be used to confirm the uptrend. Similarly for new possible downtrend is usually seen when RSI is below the 50 baseline.
Note: This is to be used as another set of confirmation before you execute your trade, RSI can be helpful in avoiding fake outs by waiting for it to reach above or below 50 to confirm the trend.
Possibility* : Probability of that event happening, when planning your trade ensure you follow proper risk management as the event might not even happen due to various factors. Some such examples are fakeouts, blackswan events, unexpected market news or events.
Explain like i am 5:
RSI above 70 means too much buyers and there is a possibility of sellers coming in and pushing the price down.
Similarly RSI below 30 means there is a possibility of buyers coming in and increasing the prices.