RSI dip-buying strategy: the rule, the risks and a free backtest

The rule in plain words

• Buy when the 14-day RSI is below 30 and the price is above its 200-day moving average.
• Sell when RSI rises back above 55.
• Stop-loss: exit if the trade falls 8% from the entry price.
• Time limit: exit after 30 trading days even if neither of the above has happened.

Why traders use it

RSI (Relative Strength Index) measures how fast and how far a price has moved recently, on a scale of 0 to 100. A reading under 30 is commonly called oversold.

The idea is mean reversion: in a healthy uptrend, sharp dips are often followed by a bounce. The 200-day filter tries to avoid buying dips in stocks that are already in a long-term downtrend.

Where it goes wrong

• Oversold can stay oversold. A stock with bad news can keep falling while RSI stays under 30.
• Gains per trade are usually small, so one large loss can wipe out several winners. That is why the stop-loss matters.
• Strong stocks rarely fall to RSI 30, so the rule may trade very few times.
• Trading costs matter more here because trades are short and profits per trade are small.

How to read your backtest

• Compare the average win with the average loss, not just the win rate. A high win rate can still lose money.
• See how many exits were stop-losses. Many stops means the dips were not bouncing.
• Try the test without the 200-day filter and notice what changes.
• Check the result after costs. Short-term rules are sensitive to brokerage and taxes.

Common questions