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RSI: Oversold/Undersold

RSI: Oversold/Undersold

2010-07-28 20:09:00
Richard Krivo, Trading Instructor

Student's Question:

Looking at the charts regarding the RSI indicator, when I go long because the indicator reached 30, it still keeps dropping. What am I doing wrong?

Instructor's Response:

Keep in mind that because the RSI reaches 30 or even goes below 30 (an area referred to as being Oversold) does not mean that the pair is immediately going to begin a bullish move to the upside. Being in oversold territory is not a signal to enter a long position and buy the pair. When a pair is "oversold" it can become even more "oversold". Take a look at the chart below for a visual on this...

Note that after the RSI touched 30, the pair still dropped almost 200 pips. Based on the RSI, the time to take a long position is after the RSI moves back above 30.

RSI_Oversold_Undersold_body_chart_7_28_10.png, RSI: Oversold/Undersold

The strongest buying signal that is generated by the RSI is when the pair has been below 30 and then moves above 30. The strongest selling signal that is generated by the RSI is when the pair has been above 70 and then moves below 70. These movements back above 30 and back below 70 are critical when interpreting this indicator and using it to time an entry.

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