A Basic Introduction to RSI:

The Relative Strength Index (RSI) is a popular and helpful momentum oscillator. The RSI compares the magnitude of a stock's recent gains to the magnitude of its recent losses and turns that information into a number that ranges from 0 to 100. It takes a single parameter, the number of time periods to use in the calculation, generally 14. 

Like most true indicators, the RSI needs one stock to be computed. 

To simplify the formula, the RSI has been broken down into its basic components which are the Average Gain, the Average Loss, the First RS, and the subsequent 'Smoothed' RS's. 

For a 14-period RSI, the Average Gain equals the sum total all gains divided by 14. Even if there are only 5 gains (losses), the total of those 5 gains (losses) is divided by the total number of RSI periods in the calculation (14 in this case). The Average Loss is computed in a similar manner. 

Calculation of the First RS value is straightforward: divide the Average Gain by the Average Loss. All subsequent RS calculations use the previous period's Average Gain and Average Loss for smoothing purposes. See the "Smoothed RS" formula above for details. The table below illustrates the formula in action. 

Note: It is important to remember that the Average Gain and Average Loss are not true averages! Instead of dividing by the number of gaining (losing) periods, total gains (losses) are always divided by the specified number of time periods - 14 in this case. 

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. Note: If the Average Loss ever becomes zero, RSI becomes 100 by definition. 

Important Note: The more data points that are used to calculate the RSI, the more accurate the results. The smoothing factor is a continuous calculation that - in theory - takes into account all of the closing values in the data set. If you start an RSI calculation in the middle of an existing data set, your values will only approximate the true RSI value. SharpCharts uses at least 250 data points prior to the starting date of any chart (assuming that much data exists) when calculating its RSI values. To duplicate its RSI number, you'll need to use at least that much data also. 

RSI  ~ Overbought / Oversold - keeping it simple:
It is generally recommended using 70 and 30 as overbought and oversold levels respectively. Generally, if the RSI rises above 30 it is considered bullish for the underlying stock. Conversely, if the RSI falls below the 70 level, it is considered a bearish signal. Some active 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. Conversely some stocks will continue to climb beyond the 70 mark level but eventually come back down. RSI is a guide to follow to guage where the stock is at in any given period of time.