TIPS #2 : To isolate major buy candidates, remember that the best opportunities lie where long-term momentum, such as a 12-month RSI, is oversold. TIPS #1 : A simple but effective method of interpreting RSI is to buy on crossing up through the 50 level and sell on the crossing down through the 50 level (Meyers 1994) This is because contra-trend breakouts do not always result in whipsaws.
A protective stop should have been placed above the point where the probabilities favored the pattern is no longer having any downside influence on the price. However, since it reverses on a dime, investor would have had to be extremely nimble to make much of a profit. In other words, if the long-term trend is bullish, then oversold readings could mark potential entry points. The rationale is that if a downside breakout takes place in a bull trends (contra-trend manner), it is not likely to hold because RSI does not have much potential to remain oversold (Pring 2004). Some traders identify the long-term bullish trend and then use oversold readings for entry points. In contrast, due to the shallower swings, a 65/35 combination may give a much better feel for the overbought/oversold extreme than the 70/30 default value for a 65-day RSI. This is due to the fact that shorter time spans result in wider RSI oscillations. For instance, an 80/20 combination may give a much better feel for the overbought/oversold extreme than the 70/30 default value for a 9-day RSI. Consequently, the 70/30 combination is inappropriate when the time span differs appreciably in either direction from the standard 14-day period. Moreover, we should remember that the longer the time span, the narrower the RSI overbought and oversold lines should be constructed and vice versa. Therefore in a bullish or bearish market, a better level for an overbought or oversold signal is 80 and 20 respectively. However as a momentum indicator, RSI is expected to trend at high values in a bullish market and at low values during a bearish market. Conversely, if RSI rises above 30, it is a bullish signal. Generally, if RSI falls below 70, it is a bearish signal. Wilder (1978) recommends using levels of 70 and 30 to indicate overbought and oversold respectively. Finally, very long term charts, going back 10 to 20 years, seem to respond well to a 12-month time span (Pring 2002). For longer-term charts, covering perhaps 2 years of weekly data, a time span of about 8 weeks offers enough information to identify intermediate-term turning points. As for monthly charts, 9-, 12-, 18-, and 24-month spans are recommended. For weekly data, the calendar quarters operate effectively, so 13-, 26-, 39-, and 52-week spans can be adopted. TIPS : For daily data, investors can use 9-, 14- 25-, 30-, and 45-day spans.