RSI Mean Reversion:
The Elastic Band Effect
Markets act like rubber bands. When price is stretched too far from its average, it eventually snaps back. Master the timing of these reversals.
What is Mean Reversion?
Instead of following the crowd into a rally or a panic, Mean Reversion traders look for the moment the crowd has overextended itself.
The Professional "Fade" Setup
Don't just buy the moment RSI hits 30. That is "catching a falling knife." Wait for confirmation.
The Dip
Price crashes and RSI pushes deep below the 30 level.
The Exhaustion
Wait for the RSI to bottom out and start curving back up while price finds support.
The Trigger
Enter only when the RSI closes back vertically ABOVE the 30 line.
The Exit
Take profits at the 50 level (The Mean) or 70 level (Overbought).
Bullish Long Setup
The "Embedded RSI" Trap
The biggest risk is a Strong Trend. In a massive bull run, RSI can stay above 70 for weeks while prices parabolic.
The 200-SMA Filter:
• Only take BUY signals if price is ABOVE the 200-Day SMA.
• Only take SELL signals if price is BELOW the 200-Day SMA.