When the Average Gain is greater than the Average Loss, the RSI rises because RS will be greater than 1. Conversely, when the average loss is greater than the average gain, the RSI declines because RS will be less than 1. The last part of the formula ensures that the indicator oscillates between 0 and 100. Generally, if the RSI rises above 30 it is considered bullish for the underlying stock. Conversely, if the RSI falls below 70, it is a bearish signal.
Some traders identify the long-term trend and then use extreme readings for entry points.
If the long-term trend is bullish, then oversold readings could mark potential entry points. Divergences Buy and sell signals can also be generated by looking for positive and negative divergences between the RSI and the underlying stock. Because of how the RSI is constructed, the underlying stock will often reverse its direction soon after such a divergence. As in that example, divergences that occur after an overbought or oversold reading usually provide more reliable signals. The centerline for RSI is 50.