RSI, Relative Strength Index, is used to estimate the momentum of buyers and sellers, measure the magnitude of price changes and to determine whether the market is overbought or oversold.
If the buying momentum is strong, there is a greater opportunity of rise. On the contrary, if the selling momentum is strong, there is a greater opportunity of drop.
However, if we only rely on price changes to determine the market situation and ignore the process within, we may overlook the change in momentum.
For example, both 2 cases are also up 8% in 20 days. In different time, trends, orders and magnitudes can vary or even be completely different. (i.e. rise slowly, fall before rise, rise and then stabilize).
To apply RSI, apart from determining the up and down trend, you can also see the momentum of buyers and sellers. If the momentum is stronger, the RSI value will tend to be more extreme.
The value range of RSI is from 0 to 100. Commonly, 50 is the demarcation line.
Value greater than 50: the buying momentum is strong, the rising magnitude is stronger.
Value less than 50: the selling momentum is strong, the dropping magnitude is stronger.
If price rises in large magnitude, the RSI value will be above 50. The stronger the buying momentum, the greater the RSI value.
On the contrary, if price drops in large magnitude, the RSI value will be below 50. The stronger the selling momentum, the smaller the RSI value
If the market does not have a clear direction, the RSI value will stay around 50.
In addition, if the value goes to extreme, there will be overbought or oversold (Generally, >70 means overbought, < 30 means oversold), there is a chance to overturn.
Value > 70: When the price rises quickly, overbought appears. If buying momentum turns weak, there is an opportunity to turn downwards.
Value < 30: When the price drops quickly, oversold appears. If selling momentum turns weak, there is an opportunity to turn upwards.