RSI Indicator Overbought and Oversold Levels

RSI indicator values of above 70 are considered to be over bought: traders consider points above the 70 level as market tops and good points for taking profits.

RSI indicator values of below 30 are considered to be over sold: traders consider points below the 30 level as market bottoms & good points for taking profits.

These overbought and oversold levels should be confirmed by RSI center line crossovers signals. If these regions give a market top or bottom, this signal should be confirmed with RSI center line crossover signal. This is because these overbought and oversold levels are prone to giving whipsaws in the market.

In the example shown below, when the RSI hit 70, it showed that the oil was overbought, and this could be considered a trading signal that the trend could reverse.

The chart then reversed the trend after a short while & started to move downwards, until it got to the oversold levels. This was considered a market bottom after which the chart started to move upwards again.

Overbought & Oversold Levels - RSI Strategies

Over Extended Overbought and Oversold Levels

When the market is trending strongly upwards or downwards the RSI indicator will stay at these overbought and oversold levels for a long time. When this happens these overbought and oversold regions cannot be used as market tops and market bottoms because the RSI indicator will stay at these levels for an extended period of time. This is the reason why we say that the overbought and oversold regions are prone to whipsaws and it is best to confirm these signals using RSI center-line cross-over strategy.

Over Extended Overbought and Oversold Levels - RSI Indicator Strategy Method