Does RSI mean reversion work?

Nothing on this page shows that it is. The page describes what people do and why. Published research on trading rules is mixed, results that looked good in one period have often faded in the next, and costs remove much of what remains. The loss figures that regulators require firms to publish show that most retail accounts trading CFDs lose money.

What do 30 and 70 mean on the RSI?

They are conventional lines, not properties of a market. Below 30 the recent falls have been much larger than the recent rises; above 70 the reverse. Some traders use 20 and 80, which gives fewer signals.

Can the RSI stay oversold for a long time?

Yes. In a steady decline the reading can remain low for as long as the decline lasts. An extreme reading describes what has happened; it does not set a limit on what happens next.

RSI mean reversion: overbought, oversold and what goes wrong

On an invented price path, the price swings back and forth and then falls steadily, with a trade each time the RSI turns back from an extreme, including the buys made on the way down: 7 trades are marked, 5 closed ahead and 2 closed behind.

A triangle marks where a trade opens and points the way it was taken. A green dot is a trade closed ahead, a red dot one closed behind. The path was invented to show how the approach behaves, including where it goes wrong. It is not market data and it proves nothing.

Also searched asRSI strategy · overbought oversold strategy · RSI 30 70 · mean reversion trading · buy the dip

A description, not a recommendation

This is a description of an approach people use. It is not a recommendation. No approach works in every market, nothing here has been shown to be profitable, and the chart is invented.

The idea

Mean reversion is the belief that a price which has moved far and fast in one direction is more likely to come part of the way back than to continue. The relative strength index, or RSI, is a common way of measuring “far and fast”: it compares the size of recent rises with the size of recent falls and gives a number from 0 to 100. A low reading is called oversold and a high one overbought.

Usually heldHours to days · others held about as long

The rule, as people usually state it

As usually stated: with a 14-bar RSI, buy when it closes back above 30 after being below it, and sell when it closes back below 70 after being above it. The trade is closed when the RSI returns to the middle, at a fixed target, or at a stop a set distance away. Some versions act the moment the level is reached; the “closes back” version waits for the turn.

What it needs from a market

A market that is moving sideways, where moves away from the middle tend to be undone.
Swings wide enough to cover the spread and leave something over.
A stop. Without one, the approach has no answer to the day the price does not come back.

What it costs

Fairly frequent: on a 14-bar setting a sideways market gives a signal every few dozen bars, and a shorter setting gives many more. Targets are modest, because the trade aims only for a return to the middle, so the spread is a larger share of each gain than it is for a trend follower. The typical pattern is many small gains and an occasional loss several times their size.

When it fails

In a strong trend. The RSI can stay below 30 for a long time while the price keeps falling, and each turn back above it is a new signal to buy a falling market.
When the stop is wide and the target near: one loss removes several gains.
After a change of conditions, such as a rate decision, when the old middle is no longer the middle.

The mistakes people make with it

Reading “oversold” as “about to rise”. It means only that recent falls were larger than recent rises.
Adding to a losing position because the reading has become more extreme.
Removing the stop because the price “always comes back”.
Using a very short RSI to get more signals, each with a smaller move and the same spread.

In the rule bench

Long when the 14-bar RSI closes back above 30, short when it closes back below 70, a stop 2 average ranges away, a target 1.5 times as far, 1% at risk, on the example pair.

The bench uses invented random prices, on which no rule has an edge, so it shows how the rule behaves and what it costs, not whether it works.

Try it on invented prices

Questions people ask

Does RSI mean reversion work?: Nothing on this page shows that it is. The page describes what people do and why. Published research on trading rules is mixed, results that looked good in one period have often faded in the next, and costs remove much of what remains. The loss figures that regulators require firms to publish show that most retail accounts trading CFDs lose money.
What do 30 and 70 mean on the RSI?: They are conventional lines, not properties of a market. Below 30 the recent falls have been much larger than the recent rises; above 70 the reverse. Some traders use 20 and 80, which gives fewer signals.
Can the RSI stay oversold for a long time?: Yes. In a steady decline the reading can remain low for as long as the decline lasts. An extreme reading describes what has happened; it does not set a limit on what happens next.

The words on this page

An explanation for study. It is not advice, a recommendation or a forecast. This is a description of an approach people use. It is not a recommendation. No approach works in every market, nothing here has been shown to be profitable, and the chart is invented.