There are 2 ways that the price of an asset/stock/security can behave: momentum or mean-reversion.
- Momentum = what goes up will continue to go up, what goes down will continue to go down.
- Mean-Reversion = what goes up will come down, what goes down will come back up.
Like Ying & Yang, these two are mathematically the inverse of each other.
Some assets are more momentum and some assets are more mean-reverting than others. Assets that are neither momentum nor mean-reverting are said to be "random walk." These are un-tradable assets because they have no "edge" or predictability. You want to trade only the most momentum or most mean-reverting assets because they naturally exhibit an edge.
Additionally, momentum and mean-reversion properties are non-constant over time and they also change based on the time interval you are looking at. For XIV on the daily interval, it exhibits a healthy dose of momentum properties and a lesser dose of mean-reversion properties but still good enough to be traded.
When an asset on a specific time interval exhibits momentum properties, you trade it using RSI2 by buying when it's overbought and selling when it's oversold. When an asset on a specific time interval exhibits mean-reversion properties, you trade it using RSI2 by buying when it's oversold and selling when it's overbought.
If you look at XIV from the 10-minute to 2-hour intervals, you can see it exhibits just mostly momentum properties. On these intervals, you would want to use momentum techniques to trade XIV.