How to Trade RSI Below 30
When the RSI indicator is below 30, the stock is considered oversold. However, just because the RSI indicator is showing the stock as oversold, doesn't mean it is time to buy the stock. Sometimes, a weak stock can keep going down while the RSI is oversold for a long period of time.
A safer strategy would be to wait for the RSI to rise and crossover above 30 and look for other signals for strength. For instance, the RSI for the DIS stock dipped below 30 since late February, and stayed there for almost 3 weeks while it's stock price kept dropping. If a trader were to buy the stock as soon as the RSI indicator dropped below 30, he would be in big trouble.
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A better strategy would be to wait for the stock to cross above 30.
- The RSI crossed above 30 on March 13 which is the first sign of recovery
- The MACD crossover on March 25 which offers a confirmation signal that the stock is indeed in the recovering mode.
- A buy signal is triggered based on the RSI and MACD Crossover indicator
You can and should combine RSI with other technical indicators because it is risky to trade base solely on RSI.
The following two stocks, TSLA and COUP always showing similar results during this period.
Using the same strategy as above where we wait for the RSI to cross above 30, and then for the MACD to crossover the signal line. We would have made a nice little profit using this strategy combining the RSI and MACD.
Technical indicators are a double edged sword. When using properly, a trader is able to gain an edge in stock trading, and trade for profit. However, when a trader falls in love with any indicator, they are doom to lose money.
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Both RSI and MACD are lagging indicators meaning they are derived from the stock price. The signals will not always work otherwise a monkey would have made money in the stock market following this strategy.
When the trade fails to move higher after the bullish signals generated by RSI and MACD, one should get out and move on to the next trade. Some traders are so stubborn and refuse to get out even when they are already losing money. Worst of all, they doubled down on their losing positions hoping to recoup their losses which makes the matters even worse. A trader should set a stop loss on every trade they execute. Before you buy a stock, you need to know how much are you willing to lose on that trade and get out when it hits your stop loss.