For those who have been reading our work will know we don’t like using off the shelf indicators as they are typically full of false signals and price volatility. RSI is one of these indicators that is not smooth and full of momentum volatility. Remember the ultimate trend following system model is not about just getting you into a position but keeping you in that position as long as possible. Now if your a shorter term investors 30 to max 60 days RSI might work for your needs, however, RSI going out longer will start seeing many mean reversions during a long term bull trend.
First for those new to the concept of selling overbought price action, this is not a value statement on the fundamentals of the security. This is reference purely the velocity and move above a stocks mean price over a specific time frame.
For example, many short term traders use Bollinger Bands to measure the stocks price above its standard deviation over a 14 day period. Typically traders will default to 2 standard deviations above the 14 day mean. While this alone is not a good indication of short term overbought, its the close and velocity of the price closing completely out of the band. We can see this below in facebook. While for swing traders this can work as a trading strategy, its a terrible strategy for longer term investors. Additionally, changing the time frame to weekly does little justice for longer term investors.