Mean reversion
RSI Mean Reversion
Buy oversold dips and sell overbought spikes, but only with the trend.
Mean reversion bets that stretched prices snap back toward an average. The RSI is the classic timing tool: it flags when a move has gone too far, too fast. The catch is that 'oversold' can stay oversold in a downtrend, so a trend filter is essential.
How it works
The strategy waits for the RSI to reach an extreme against a short-term stretch, then enters expecting a reversion. A higher-timeframe trend filter keeps you trading with the dominant direction, which is what separates a robust mean-reversion system from one that catches falling knives.
Entry rules
- ▸Define the trend with a moving average (e.g. price above the 200 EMA = uptrend).
- ▸In an uptrend, go long when RSI crosses back up through 30–40.
- ▸Optionally require bullish divergence for higher-quality entries.
Exit & risk
- ▸Take profit when RSI reaches the opposite extreme (e.g. 60–70) or price hits a target.
- ▸Stop-loss an ATR-multiple below the entry swing low.
- ▸Exit if the trend filter flips against the position.
Best for
Range-bound and pull-back conditions within a trend. It struggles in strong, one-way trends with shallow pullbacks, which is why the trend filter and a sensible stop matter.
Build this strategy in Algovex
Every component of this strategy is a node in Algovex — drop them on the canvas, connect the logic, backtest on a real engine, and export to code. No programming required.
Key terms
Frequently asked questions
What RSI level is best for mean reversion?
The classic 30/70 levels work, but waiting for RSI to cross back up through 30–40 (rather than just touching 30) filters out weak signals. Always backtest the thresholds on your instrument and timeframe.