RSI indicator buy and sell signals are based on oversold and overbought conditions on a chart. The RSI is a measurement of price moving too far and too fast in one direction and as the RSI gets extended farther and farther from the 50 RSI baseline the probability of a reversion to the mean increases.
Think of the RSI as a risk/reward detector and the reward diminishes for long positions in the 70 RSI zone and the short sellers can see less potential reward as the RSI moves near the 30 RSI. The odds of successful dip buys increases as the RSI reaches near 30 RSI and short selling has a greater chance of success near the 70 RSI.
The RSI works best in range bound markets for identifying the boundaries of potential support and resistance. In a strongly trending market a break above the 70 RSI can be a momentum signal to the upside and a breakdown below the 30 RSI can signal the start of a downtrend. As a trend signal the breaking of the 30/70 RSI boundaries can signal a potential parabolic trend beginning.
In this context the RSI is set at a 14 day parameter and on a daily chart. An RSI can be used on all timeframes but should be looked at historically for a reference point on how it should work on a specific chart in a trading time period based on historical behavior.
