How To Trade - RSI Indicator for Overbought and Oversold Levels

RSI values of above 70 are considered to be overbought; traders consider points above the 70 level as market tops and good points for taking profits. RSI values of below 30 are considered to be oversold; traders consider points below the 30 level as market bottoms and good points for taking profits. 

These levels should be confirmed by center line crossovers. If these regions give a market top or bottom, this signal should be confirmed with a center line crossover. This is because these levels are prone to giving whipsaws in the market. In the example below, when the RSI hit 70, it showed that the currency was overbought, and this could be considered a signal that the currency could reverse. The currency then reversed after a short while and started to move downwards, until it got to the oversold levels. This was considered a market bottom after which the currency started to move upwards again.

When the market is trending strongly upwards or downwards the RSI will stay at these levels for a long time. When this happens these regions cannot be used market tops and bottoms because the RSI will stay at these levels for an extended period of time. This is the reason why we say that RSI overbought and oversold regions are prone to whipsaws and it is best to confirm the signals using center-line crossovers.