The RSI signal tells you how prices are moving from 0 to 100. A reading of oversold (below 30) means the price is too low, while a reading of overbought (above 70) means the price is too high. Professional traders monitor the levels of 80 (overbought) and 20 (oversold) to identify stronger downward movements.
You can often find out when traders know to buy low and sell high by looking at one technical tool: the RSI indicator. What is the Relative Strength Index (RSI)? It tells you if a stock or other asset is overvalued (ready to fall) or undervalued (ready to rise). It offers suggestions for potential market turning points.
Here is everything you need to know about the overbought and oversold levels of the RSI, how they work to send buy and sell signals, and how you can use them with Elliott Wave analysis to get better results.
In short:
- RSI above 70 indicates a potential sell signal.
- RSI below 30 indicates a potential buy signal.
- RSI levels of 80 and 20 indicate strong reversal alerts.
After that, you’ll become an expert in protecting your money, making better trading decisions, and identifying reversals at an early stage.
RSI Overbought and Oversold Levels
Let’s revert to the fundamentals. The RSI, which stands for Relative Strength Index, was developed by J. Welles Wilder to demonstrate momentum. The range of values from 0 to 100 indicates the magnitude and rate of change in the price.
Here’s how it works:
- When the RSI exceeds 70, the asset is regarded as overbought.
- When the RSI falls below 30, it indicates that the asset is oversold.
The 70 and 30 levels are pivotal for understanding the RSI’s concepts of overbought and oversold situations.
The RSI can be likened to a market thermometer. When it indicates an overheated (overbought) market, it suggests a potential decrease in prices. On the other hand, when it suggests that the market is too cool (oversold), a price rebound could be imminent.
Example:
Consider yourself an outsider observing Reliance Industries. Several sessions have passed with the stock rising, and the relative strength index (RSI) reaches 75.8 on the daily chart.
RELIANCE / Daily Chart
If this pattern persists, it may indicate that consumers are growing weary of the market, and a brief price decline may be imminent. If you’re seeking an opportunity to sell or profit, be vigilant for price reversal candlestick patterns.
RSI Overbought and Oversold Levels: Buy and Sell Signal Guide
| RSI Level Range | Market Condition | What It Indicates | Â Trading Signal | Best Practice for Traders |
| 0 – 20 | Extremely Oversold |
Panic selling pushed the price far below fair value. |
Strong Buy Signal (Reversal Zone) |
Look for bullish candlestick patterns and the Elliott Wave’s end on daily or weekly charts. |
| 20–30 | Oversold |
Selling pressure is exhausting. |
Potential Buy Signal |
Check for volume growth, support zones, or bullish divergence. |
| 30–50 | Neutral to Weak Momentum (Bearish) |
The price is stabilizing, but the trend remains unclear. |
No Clear Signal |
Use trendlines or moving averages to wait for confirmation. |
| 50 | Equilibrium Zone |
Balanced buying and selling. |
Trend Confirmation Level |
This level serves as both support during uptrends and resistance during downtrends. |
| 50–70 |
Strong Momentum (Bullish) |
Buyers are gaining control. |
Trend Continuation |
This is ideal for maintaining long positions during robust upward trends. |
| 70–80 | Overbought |
Price may be overvalued. |
Potential Sell Signal |
Avoid fresh buys. Wait for bearish confirmation or divergence. |
| 80–100 | Extremely Overbought |
There is a risk of euphoric buying leading to a sharp correction. |
Strong Sell/Profit Booking Zone (Reversal Zone) |
This zone is ideal for identifying Elliott Wave tops and long-term reversals. |
What Happens if RSI Is Overbought?
When the RSI is too high, it means that buyers have been in charge for a while, and the price has probably gone too high too quickly.
But here’s something important:
When a price is overbought, it doesn’t always mean it will fall right away. During a strong uptrend, the RSI can remain above 70 for an extended period before reversing.
So, what do you need to do?
For confirmation, you need to combine price action with Elliott Wave analysis or RSI. For example:
- The potential for a market reversal becomes highly significant when the Relative Strength Index (RSI) surpasses 70 and the Elliott Wave pattern indicates the fifth wave.
- You may strategize a sell trade or prepare to realize profits.
Real Market Insight:
In 2021, when Tesla’s relative strength index (RSI) reached 94, many investors overlooked this signal due to the company’s remarkable upward trajectory.
TSLA / Daily Chart
The price fell around 20% shortly thereafter. In its most effective form, this indicator represents the overbought signal generated by the Relative Strength Index.
What Happens if RSI Is Oversold?
An oversold relative strength index (RSI) indicates that sellers have pushed the price too low, which indicates that a bounce may be on the horizon.
If the relative strength index (RSI) falls below 30, it is typically an indication that the asset may be undervalued, and buyers may soon enter the market.
But again, don’t jump in blindly. Wait for confirmation, just because:
- The trend is shifting now that the RSI is back above 30.
- Bullish candlestick patterns, such as hammer or engulfing candles, are indicative of this trend.
- The support zone in the Elliott Wave structure usually appears at the end of Waves 2 or 4.
Example:
Let’s say that Infosys’s Relative Strength Index (RSI) drops to 15.03 after a big sell-off.
INFY / Daily Chart
Subsequently, you observe a bullish engulfing pattern forming on the chart. If Elliott Wave analysis shows a corrective wave has ended, this indicator may be a buy signal.
This combination helps you enter early before the big reversal move begins.
Importance of RSI 20 and 80 Levels (for Reversal)
Advanced traders, such as yourself, frequently look at RSI levels 80 and 20 for stronger reversal zones. Most traders only look at RSI levels 70 and 30, but you could be one of them.
Here’s why:
- When the RSI crosses above 80, it indicates an extreme overbought condition.
- When the RSI falls below 20, it indicates an extreme oversold condition.
Within the framework of Elliott Wave theory, these extreme levels frequently coincide with wave endings. For example, the Relative Strength Index (RSI) could hit 80 during the last push of Wave 5 or drop below 20 during the last leg of Wave C as a correction.
Pay close attention to these levels, and you’ll be ready for big changes instead of small ones.
Pro Tip
Long-term reversal trading requires the RSI 20/80 setup on daily or weekly charts. It removes market noise and yields more accurate results.
Final Thoughts
The RSI overbought/oversold strategy is simple but effective. Stretching market sentiment can cause buyers or sellers to lose control.
With RSI trading, Elliott Wave analysis, and price action, you can confidently identify high-probability reversal points.
FAQ
What RSI is a buy signal?
When the RSI goes below 20 and then back up above it, it's usually a sign to buy. This movement shows that buyers are coming back and the need to sell is going down. Before they make a trade, smart traders check this signal against price action or breaks in trendlines to make sure it is right.
Should I buy when RSI is oversold?
It can be profitable to buy when the RSI is oversold, but the timing is important. If the RSI is below 30 (or 20 for stronger setups), prices have dropped too much and too quickly. Don't go in until you see proof, like a bounce or a bullish candlestick pattern. This will assist you in avoiding potential losses.
Is oversold good or bad?
Being oversold isn't always negative; it can present an opportunity. It means that there is a lot of pressure to sell the asset, which makes it worth less for a short time. If other technical signals support this, traders who are willing to wait may want to look for possible turns and get ready for a rebound at this time.
Disclaimer
This post is just meant to give you information; it is not financial advice. Trading and investing are risky, and results from the past don’t always mean results in the future. People who want to invest or trade should do their research and think about their situation before making a decision. This content’s author and platform are not responsible for any damages or losses that happen because of its use. Get personalized help from a qualified financial expert.
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