The RSI is an acronym for the relative strength indicator. This is one of the most popular indicators used in Forex and equity markets. It is a lagging indicator rather than a leading one, meaning that its purpose is to give information on current market conditions based on past data whereas leading indicators use past data to essentially predict what will happen next. The primary purpose of this indicator is to give one an idea of when the market is in extremely oversold or overbought conditions, which are typically ideal for correction in prices.
The way that the RSI works in trading is fairly simple but it has to be used slightly differently depending on the respective market conditions. One should first try to get a feel for what kind of day it is. Is the market trending up? Is it trending down? Is the market trading more within prices, in a certain range? If the latter is true then the essential equilibrium of the RSI indicator should be understood to be at about zero, perhaps slightly calibrated up or down to account for market trends. However, if the market is trending up or down, the equilibrium of the RSI should be understood to be higher or lower respectively.
This may seem complicated but it will look very natural if you get a chance to watch the RSI in action. When a stock is in a range, it can only really be as under-bought as it is over-bought, meaning that at highs it may tick up to fifty or so and at lows approximately the same number. When a stock is trending up however one should expect naturally higher overbought ratings, meaning that sometimes even low overbought ratings (or pullbacks) may allow for buying opportunities. The same is true of a stock that is trending down. In that course, the indicator will naturally show varying levels of oversold indications. That doesn’t mean that you want to buy the stock just because it has an oversold indicator. One of the first rules you learn in trading in to go with the trend. One has to know when to ignore the indicators when they contradict the basic tenets of trading, which happens occasionally.
All in all the RSI is a good indicator to get started with. I also recommend checking out the MACD and Stochastics for those who are looking for new strategies, and not to rely on them too heavily as the market is always changing.