RSI Reversal

No! RSI can stay oversold for extended periods in downtrends. Always wait for confirmation: 1) RSI turning back above 30, 2) Price closing above prior bar high, 3) Preferably trend filter showing uptrend. Never buy blindly on oversold alone.

14 periods is the standard, established by Wilder. Shorter periods (7-10) are more sensitive but give more false signals. Longer periods (20-25) are smoother but slower. Start with 14 and only adjust based on your backtesting results.

80/20 represents 'extreme' levels that filter for stronger signals. At RSI 20, the oversold condition is more severe than at 30, suggesting higher probability of reversal. Trade-off: fewer signals but higher quality.

RSI reversals are typically short-term trades (2-10 days). Mean reversion bounces are often quick moves. Don't overstay - exit when RSI reaches 50 (centerline) or opposite extreme. Extended holding reduces win rate.

Both are momentum oscillators but: RSI is smoother (Wilder smoothing), Stochastic is more sensitive. RSI measures overall momentum, Stochastic measures where price closed within its recent range. RSI generally gives fewer but cleaner signals.

When price makes new low but RSI makes higher low (bullish) or price makes new high but RSI makes lower high (bearish), you have divergence. Wait for price confirmation - don't enter on divergence alone. Divergence at RSI extremes (<30 or >70) is strongest.

Use 50-day SMA as trend filter. Price above SMA = uptrend (only take oversold long signals). Price below SMA = downtrend (only take overbought short signals). This dramatically improves win rate by avoiding counter-trend traps.

Failure swing: RSI reaches extreme (e.g., 25), bounces (e.g., to 35), returns but fails to reach prior extreme (e.g., only 28), then breaks above the intermediate high (35). This shows clear momentum failure and is Wilder's preferred signal.

Higher timeframe (weekly) provides context, trading timeframe (daily) provides signal, lower timeframe (4hr) times entry. Ideal: All timeframes oversold for longs. If higher TF is overbought but lower TF oversold, it may just be a pullback - be cautious.

Yes. Deeper extremes (RSI 18 vs 28) indicate stronger reversal probability. Use multipliers: RSI < 20: 1.25× base risk; RSI 20-25: 1.1×; RSI 25-30: 1×. Add multipliers for divergence and trend alignment. Cap at 2.5% max risk.

Calculate RSI's 20-period (or longer) percentile distribution. Set overbought at 90th percentile, oversold at 10th percentile. This adapts to each stock's character - some oscillate 35-65, others 20-80. Dynamic thresholds improve PF from 1.65 to 2.05.

Apply Bollinger Bands (20-period, 2 SD) to RSI itself. RSI touching upper/lower band indicates statistical extreme for that stock's RSI behavior. Often catches reversals before fixed 30/70 levels. Improves PF to ~2.15 vs 1.65 fixed.

Oversold RSI (especially with divergence): Buy calls or bull put spreads. Overbought RSI: Buy puts or bear call spreads. Consider IV - extreme RSI often coincides with elevated IV, favoring credit strategies if selling premium. Exit when RSI crosses 50.

Range-bound markets (ADX < 20) produce best results (PF ~2.55). Moderate trends are acceptable (PF ~1.85). Strong trends (ADX > 30) are worst (PF ~1.15). Monitor ADX or measure range expansion to filter market conditions.

Calculate RSI daily for universe. Score signals: RSI extremity (+1 to +3), divergence (+2), trend alignment (+1), support level (+1). Rank by score. Take top-scoring signals with score > 5. Track performance by score category for optimization.