Trading signals using the RSI

The clearest trading signal appears when the RSI tracks up into the overbought region or tracks down into the oversold region. When the RSI reaches the overbought condition it’s generally interpreted as a sell (or avoid) signal, and when the RSI reaches the oversold condition it’s a buy signal. However, as I’ve just pointed out, in sustained uptrends and downtrends the RSI signal won’t usually be a good one to act on. If you act immediately on a sell signal you may lose a good deal of the potential profit that’s available as the price uptrend continues. Similarly, if you act too quickly on an RSI buy signal you may buy at too high a price as the downtrend continues after the RSI signal first appears.

For these reasons I believe it’s better to use the RSI tracking into overbought or oversold levels as a preliminary or cautionary signal, and to use the following RSI signals as more reliable ones for identifying trend turning points: