Overbought and Oversold RSI - The Myth !

Generally, When RSI shows values higher than 70 or below 30, this is to considered as stock or index is overbought or oversold. But that's not always the case.

As we just learned In The Introduction : Relative Strength Index ( RSI ) that a high RSI means that there were more bullish candles then bearish candles. As stock or index can't go up or down in straight line there will be some pullbacks. IF RSI gets Overbought or Oversold and we get a minor pullback in prices then it must not be considered as a reversal in direction.

It Can be dangerous to believe that just because the RSI shows overbought or oversold condition then its time to sell or buy.

Once we understand What RSI really does, Overbought and oversold conditions must not be a signal of reversal for us which indicate that price will change its direction.

It's a myth and we may miss out on a lot of bigger moves on those momentum stocks.
Following example is a perfect case of Overbought And Oversold RSI And still price continued its Main Direction on Weekly, Daily and on 15 Minutes Charts as well.

Example 1) When Price was at 500 levels RSI did show overbought Conditions and From that, it remained in overbought zone for a long time and price rallied almost 5 times to 2500 levels.

Example 2) RSI was Oversold When Price was around 880 and Since then it made a low of 670 Almost 25% fall remaining in Oversold Conditions. ( Daily Chart )

Example 3) Nifty on 15 Minutes Chart Since when RSI Went below 30, Oversold condition and Nifty gave up another 300 points from there.

Example 4) Banknifty Rallied almost 700 Points Since RSI showed Overbought Condition. ( 15 Minutes )

The RSI done not provide signals to buy when it is overbought or oversold. It simply means that the prices are very strong or very weak.

I know that most of experience traders are here who already knows this things.

Thank you,
can you look at venkys now, it seems to be starting a rise after the fall
taking support at the 50 day sma
Hi, Just want to add a point - If the stock is trending don’t use RSI or Stochastics.
If the stock is trading then only use RSI.

If ADX is greater than 30, it means trending , plot moving averages and look for crossovers for entry and exits.
Whenever AdX below 25, it means trading ,use RSI oversold or overbought range for proper entry and exits.

Praveen Dodda
+1 Reply
Equity-Earningz PraveenKumar
@PraveenKumar, Yes, For Trend following moving averages can be used. Personally, I prefer price action and patterns over this lagging indicators and averages. Because often it gives you false signals. That's what my experience is with indicators and moving average crossovers. :)
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