Example: Trading using RSI with Overbought/Oversold Signals

Case Study: Cairn India Limited

The chart below is of Cairn India Limited for a period from October 2009 to June 2010.We have plotted points where RSI is considered overbought when above 70 and oversold when below 30.



If RSI is above 70, wait till it drops below 70, similarly when RSI is below 30, then wait for it till it rises above 30 before you do trading. We will try to study such a scenario with an example/case study.Few trading occasions:

1. First occassion

• At point A the RSI crosses 70.
• RSI stays above 70 for sometime,wait till it dips down below 70.
• At point B it goes down below 70,where a sell signal is generated.
• The price at point B is 289.15 .

2. Second occassion

• At point C the RSI crosses 70.
• RSI stays above 70 for sometime,wait till it dips down below 70.
• At point D it goes down below 70,where a sell signal is generated.
• The price at point D is 283.15 .

3. Third occassion

• At point E the RSI crosses 70.
• RSI stays above 70 for sometime,wait till it dips down below 70.
• At point F it goes down below 70,where a sell signal is generated.
• The price at point F is 293.15 .
• Playing with stop loss technique could have got immense profit.

4. Fourth occassion

• At point G the RSI crosses 30 .
• RSI stays below 30 for sometime,wait till it crosses above 30.
• At point H it goes up 30,where a buy signal is generated.
• The price at point H is 260.7 .
• Wait till goes above 70 and comes down to 70 again.

5. Fifth occassion

• At point I the RSI crosses 70.
• RSI stays above 70 for sometime,wait till it dips down below 70.
• At point J it goes down below 70,where a sell signal is generated.
• The price at point J is 311.65.

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