Here are some real stock examples where traders may have applied the RSI. Below shows the meaning of relative strength index and indicator trading strategy actions implemented into trading strategies scenarios.
RSI interpretations
Example 1: Overbought Signal – Tesla Inc. ($TSLA)
- Scenario: In late 2021, Tesla’s stock was on a significant upward trajectory. On November 4, 2021, the daily RSI for Tesla reached over 80, indicating an overbought condition.
- Action:
Traders might have seen this as an opportunity to take profits or initiate short positions expecting a correction.
Following this signal, Tesla’s stock price did experience a downturn, dropping from around $400 to below $350 in the weeks that followed.
Example 2: Oversold Signal – Netflix Inc. ($NFLX)
- Scenario: In early 2022, Netflix saw a significant drop after disappointing subscriber growth numbers. On January 21, 2022, the daily RSI hit below 30, suggesting the stock was oversold.
- Action:
This could have been a signal for traders to buy Netflix at a perceived low, expecting a rebound.
Indeed, after this oversold signal, Netflix stock did see a partial recovery, moving from around $397 to $415 in the short term before further volatility.
Example 3: Bullish Divergence – Apple Inc. ($AAPL)
- Scenario: In late March 2020, during the market crash due to the onset of the global health crisis, Apple’s stock made lower lows, but the RSI on the weekly chart began forming higher lows.
- Action:
This divergence indicated that selling pressure was decreasing, hinting at a potential reversal.
Many traders might have started accumulating Apple stock or options positions around this time, which proved beneficial as the stock began a significant recovery in the subsequent months.
Example 4: Bearish Divergence – Amazon.com Inc. ($AMZN)
- Scenario: In early 2021, after a strong run, Amazon’s stock on a weekly chart made new highs, but the RSI was showing lower highs around the same time.
- Action:
This bearish divergence could have been a signal for traders to either sell or hedge their positions.
Amazon’s stock indeed saw a correction from its peak, providing an opportunity for those who acted on the RSI’s warning.
Example 5: Failure Swing – Microsoft Corp. ($MSFT)
- Scenario: In mid-2022, Microsoft’s RSI on the daily chart dipped below 30, then rose above 40, fell again but not to a new low, and then surged back above the previous high.
- Action:
This bullish failure swing was a sign of potential upward momentum.
Traders might have seen this as a buying opportunity, and Microsoft’s stock did recover from around $250 to above $270 in the following weeks.
Practical Considerations
- Market Context: Each of these examples should be taken in the context of the broader market environment, including macroeconomic factors, sector performance, and company-specific news.
- Risk Management: Always use appropriate risk management tools like stop-loss orders. The examples here are not guarantees of future performance but illustrate how RSI signals were used in the past.
- Confirmation: These signals are more robust when confirmed by other indicators or market analysis techniques.
Remember, these are historical examples and do not ensure future results. Each trading decision should be made with current market conditions in mind, and interpretation of the relative strength index (RSI) should be one of many tools in a trader’s arsenal. See this post of a real trade scenario as well as this post about other technical indicators for day trading options, stocks, crypto, futures, and forex. They all work well when combines for an overall assessment of where the price action is heading.
