The Relative Strength Index, or RSI, has been designed to help traders evaluate the strength of the market. Displayed in a separate box, it will identify overbought and oversold conditions.
The RSI is scaled from 0 to 100. The 0-30 area is considered as the oversold region and the 70-100 as the overbought zone. As it says by itself, there are increasing chances that the price recovers when it is in the oversold zone. Contrarily, if the RSI rises above 70, the chances of a price decline grow.
The RSI is calculated within a period of candles. The default setting used is 14. It is recommended to have the same parameter.
The chart of BTC/USD above shows the RSI in the lower box. When crossing up 70 on the RSI, the price quickly went in the overbought zone, started a downtrend. Then it crossed down 30 on the RSI, reaching the status of oversold, and then reversed into an uptrend.
Be careful, trading RSI is dangerous. Buying the oversold zone may not always lead to an uptrend. Sometimes the trend is just losing its strength for a few candles of sideways price movement, giving time for the RSI to leave the oversold area, and then resuming its downtrend. Moreover, the RSI helps to determine the strength of a trend. An RSI above 50 will help the confirmation of an uptrend. An RSI below 50 will provide a downtrend confirmation.
Read more about RSI here.