RSI mean reversion

The relative strength index compares recent gains with recent losses and plots the result from 0 to 100. A simple mean-reversion rule buys after RSI falls to an oversold level and sells after it recovers, on the idea that a short, sharp dip will bounce. In a bull market, traders often only take the long side and require price to stay above a long moving average.

Not investment advice. Nothing here is a recommendation to buy or sell anything. Backtests and historical studies are not guarantees, and a rule that worked in one sample can fail in the next. Trading can lose money. Links are for education, not endorsements. Do your own research.

Rules

The default length is 14, with 70 treated as overbought and 30 as oversold. A stricter short-term version, associated with Larry Connors, uses a 2- or 4-period RSI, buys below 10 or 30 only if price is above the 200-period average, and exits when RSI rises back through a midline such as 50 or 70. Shorting overbought RSI in a strong uptrend is a different, riskier rule.

Where AI fits

AI can sweep the RSI length and the entry and exit thresholds, then reject combinations that only work on the training sample. A classifier can decide whether the current regime is the kind of dip-buying market this rule needs. An LLM can also reproduce a published ruleset so you can see if your own test matches the description.

Markets

Equity indexes and large-cap stocks, where dips have often been bought. Less suited to instruments that trend one way for months.

Timeframes

Daily for the Connors-style version. 14-period RSI is used from intraday to weekly.

Risks

Oversold can get more oversold in a crash. A backtest that never compares itself with buy-and-hold can look clever while adding little. Short-length RSI is sensitive to the exact threshold.

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