RSI Trading Strategy: How I Stopped Buying Every Oversold Signal (And Started Making Money)

"RSI is oversold! Time to buy!"

Famous last words.

I've lost more money buying "oversold" conditions than I care to admit. RSI at 25. Must be a bottom, right?

Then RSI goes to 20. Then 15. Then 10. Price keeps falling. My account keeps bleeding.

The indicator was oversold. The market didn't care.

The RSI Myth

Let me bust a myth that cost me thousands.

Oversold doesn't mean "buy." Overbought doesn't mean "sell."

RSI measures momentum. When RSI is low, it means price has been falling. That's it. It doesn't mean price will stop falling.

In a strong downtrend, RSI can stay "oversold" for weeks. Months even. Buying every RSI 30 reading in a bear market is a fast way to go broke.

I learned this the hard way. Multiple times. I'm a slow learner.

What RSI Actually Tells You

RSI (Relative Strength Index) measures the speed and magnitude of recent price changes.

• RSI above 70: Price has been rising strongly
• RSI below 30: Price has been falling strongly
• RSI around 50: Price is relatively balanced

That's useful information. But it's not a trading signal.

The signal comes from context. What's the trend? Where's the level? What's the price action saying?

How I Actually Use RSI

After years of getting burned, here's my RSI playbook.

1. RSI Divergence (The Only Signal I Trust)

This is the one RSI signal that actually works for me.

Bullish divergence: Price makes a lower low, but RSI makes a higher low.

Translation: Price is falling, but momentum is weakening. Sellers are losing steam.

Bearish divergence: Price makes a higher high, but RSI makes a lower high.

Translation: Price is rising, but momentum is weakening. Buyers are losing steam.

Divergences don't guarantee reversals. But they're a warning sign. Combined with a key level and price action confirmation, they're powerful.

2. RSI + Trend Direction

Here's a simple framework:

In an uptrend:

• RSI pullback to 40-50 = potential buying opportunity
• RSI below 30 = deeper pullback, wait for confirmation
• RSI above 70 = trend is strong, don't short

In a downtrend:

• RSI rally to 50-60 = potential shorting opportunity
• RSI above 70 = deeper rally, wait for confirmation
• RSI below 30 = trend is strong, don't buy

Notice: I'm not buying oversold in downtrends or selling overbought in uptrends. That's fighting the trend. Bad idea.

3. RSI at Key Levels

RSI alone means nothing. RSI at a key level means something.

Price at major support + RSI divergence + bullish candle = high probability long.

Price in the middle of nowhere + RSI oversold = probably a trap.

The level matters more than the indicator.

My RSI Trading Setup

Here's a real strategy I use.

The Divergence Reversal

Conditions:

1. Price at identified support/resistance level
2. RSI divergence present (bullish at support, bearish at resistance)
3. Confirmation candle (engulfing, pin bar, etc.)
4. Volume above average on confirmation candle

Entry: On close of confirmation candle Stop: Beyond the recent extreme Target: Next major level or 2:1 reward

I set this up in dashpull as a conditional order. The system watches for divergence + level + confirmation. When all conditions align, it executes.

The RSI Settings Debate

"Should I use RSI 7 or RSI 14 or RSI 21?"

Honestly? It doesn't matter much.

RSI 14 is the default. It works fine. Shorter periods (7) are more sensitive. Longer periods (21) are smoother.

I use RSI 14. I've tested others. The difference is marginal.

Don't waste time optimizing RSI settings. Focus on how you use it.

Common RSI Mistakes

Mistake 1: Buying Every Oversold Reading

I've said it three times already. I'll say it again.

Oversold in a downtrend = price keeps falling.

Don't buy just because RSI is low. Wait for trend change or at least a key level with confirmation.

Mistake 2: Ignoring the Trend

RSI works differently in trends vs. ranges.

In a range, overbought/oversold extremes are meaningful. Price tends to reverse at range boundaries.

In a trend, extremes just mean the trend is strong. Fighting them is painful.

Know your context.

Mistake 3: Looking for Perfect Divergences

Textbook divergences are rare. Real divergences are messy.

The lows don't have to be exactly aligned. The RSI reading doesn't have to be exactly higher. Close enough is good enough.

Don't miss good setups waiting for perfection.

Mistake 4: Using RSI in Isolation

RSI + nothing = bad trades.

RSI + trend + level + price action = good trades.

Never use any indicator in isolation. Always combine with other factors.

RSI in Different Timeframes

Here's something useful:

Check RSI on multiple timeframes.

If daily RSI is oversold AND 4H RSI is showing divergence AND 1H RSI is turning up... that's confluence. Multiple timeframes agreeing.

If daily RSI is oversold but 4H and 1H are still falling... the bounce might not be ready yet.

I use higher timeframe RSI for direction, lower timeframe RSI for timing.

Automating RSI Strategies

The beauty of RSI is that it's quantifiable. A number. Easy to code into conditions.

In dashpull, I can set up:

Condition set 1:

• RSI(14) below 35
• Price within 1% of support level
• Bullish engulfing pattern detected

Condition set 2:

• RSI(14) current low > RSI(14) previous low (divergence)
• Price current low < Price previous low (divergence)
• Bullish candle at support

When conditions are met, the order executes. I don't need to watch RSI all day.

The RSI Reality Check

Let me give you some honest numbers.

RSI oversold alone: ~40% win rate (basically random) RSI oversold + uptrend: ~55% win rate RSI divergence + key level: ~60% win rate RSI divergence + key level + confirmation: ~65% win rate

These are rough estimates from my own trading. Your results may vary.

The point: RSI alone is useless. RSI combined with other factors is useful.

The Bottom Line

RSI is a tool. A useful tool when used correctly.

Stop using it as a buy/sell signal. Start using it as one piece of a larger puzzle.

The puzzle includes:

• Trend direction
• Key levels
• Price action
• Volume
• And yes, RSI

When all pieces align, you have a trade. When only RSI is signaling, you have a trap.

dashpull helps me combine all these pieces into conditional orders. RSI condition + level condition + pattern condition = execute. No emotional interference. No "but RSI says..."

Just systematic execution of a complete strategy.

Ready to build RSI-based conditional orders? Try dashpull →