Is RSI 30 A Reliable Buy Signal?

The Relative Strength Index (RSI) is a staple in technical analysis, often used to spot oversold conditions. When RSI dips to 30 or below, many traders see it as a potential buy signal, expecting a price reversal. But is this level truly a reliable entry point, or could it be a bull trap luring traders into false hope?

To find out, we backtested a 5-day RSI strategy on two assets—SPY (S&P 500 ETF) and Bitcoin—holding positions for 1 to 10 days. The results? Surprisingly robust. Let’s dive into what RSI 30 signals, why it matters, and whether it’s a strategy you can trust.

Understanding RSI 30: What Does It Signal?

RSI, developed by J. Welles Wilder, measures price momentum on a scale of 0 to 100. A reading below 30 typically indicates an asset is oversold, suggesting that selling pressure may be nearing exhaustion.

For our backtest, we used a 5-day RSI, which calculates momentum over a short five-day period, making it sensitive to quick price swings. When RSI hits 30 or lower, it’s a signal that the asset might be undervalued—prompting traders to buy in anticipation of a bounce.

But here’s the catch: oversold doesn’t always mean a reversal is imminent. Prices can stay oversold for extended periods, especially in strong downtrends, potentially trapping bullish traders. Our backtest aims to separate fact from fiction by examining real-world outcomes for SPY and Bitcoin.

Backtesting RSI 30: The Setup

To test the reliability of RSI 30 as a buy signal, we ran a backtest with the following parameters:

• Assets: SPY (tracking the S&P 500) and Bitcoin (BTC/USD).
• RSI Period: 5 days, calculated using daily closing prices.
• Entry Rule: Buy when RSI crosses below 30.
• Holding Period: Exit after 1 to 10 days (tested individually for each holding period).
• Time Frame: from inception until today.
• Metrics: Win rate (percentage of profitable trades), average return per trade, and maximum drawdown.

This setup allowed us to evaluate whether RSI 30 delivers consistent gains across different market conditions and asset classes.

SPY Results: A Steady Performer

For SPY, the RSI 30 signal proved to be a reliable entry point. Across the tested holding periods (1 to 10 days), the strategy showed:

These results suggest that SPY tends to rebound after hitting RSI 30, likely due to the S&P 500’s mean-reverting nature and broad market support. Shorter holding periods (e.g., 3–5 days) often outperformed longer ones, as momentum shifts quickly in equities.

Bitcoin Results: High Risk, High Reward

Bitcoin, known for its volatility, delivered even more compelling results. The backtest showed:

Bitcoin’s rapid price swings make it a good candidate for short-term RSI strategies, but the results are a bit erratic. The 5-day RSI 30 signal captured quick rebounds, especially in bull markets. However, drawdowns were larger than SPY’s, reflecting Bitcoin’s higher risk. During crypto winters (e.g., 2018, 2022), RSI 30 signals occasionally led to losses, as oversold conditions extended in deep bearish trends.

Bull Trap or Buy Signal? Key Takeaways

The backtest results paint a clear picture: RSI 30, when used with a 5-day period, is a pretty good signal for both SPY and Bitcoin, particularly for short holding periods (3–5 days). However, it’s not foolproof, and the results can improve by using a better sell signal than just a time stop.

Practical Tips for Using RSI 30

Ready to incorporate RSI 30 into your trading? Here’s how to do it effectively: backtest on each asset you are trading.