For a bullish signal to be generated, the RSI must rise above the 30 threshold after first establishing a 0-30 oversold condition. Alternately, a bearish signal will be generated when the RSI falls from the 70-100 overbought zone. At its core, the RSI looks at the current price of an instrument and assesses its strength when compared with its previous prices. Although this is similar to relative strength, the two should not be confused because RSI assesses its previous price as opposed to the price of a particular market.
On a vertical scale, RSI is numbered from 0 to 100 with the formula being 100-[100/(1+A)] - in this scenario, A equals the average of ‘up’ closes over a specific period of time divided by the average of all the ‘down’ closes over the same time period. We use a 14-day period where the ‘up’ and ‘down’ close represent the change in overall price from one close to the next.
Sometimes, the RSI is considered to be more clear than the price, the support and the resistance lines. By using RSI, failure swings can be calculated which means that breakouts can be detected. When the RSI passes through a previous high or low, this is known as a failure swing.