How to use the Relative Strength Index

This technical indicator could drop clues that trends are played out or about to change.

  • Fidelity Active Trader News
  • Technical Indicators
  • Active Trader Pro
  • Brokerage
  • Stocks
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

How do you know if a stock is cheap or expensive? There are many tools that you can use to evaluate an investment opportunity. For example, you could look at the stock price in the context of earnings. If you like chart analysis, you could use a technical indicator called the Relative Strength Index (RSI).

Technical indicators, like RSI, are one tool used by chart analysts. Fidelity believes that earnings and other fundamental metrics of a business drive stock returns over time. Technical indicators may give you an idea of when you might want to buy or sell, based on the trading behavior of other investors.

How does RSI work?

The Relative Strength Index is an oscillator. It swings back and forth between upper and lower boundaries and may show you if a stock is overbought or oversold. RSI ranges between 0 and 100. According to most chart analysts, RSI levels over 70 point to an overbought situation, which could signal “sell,” while an RSI level under 30 shows that the stock may be oversold, maybe signaling “buy.”

Those levels are guidelines—not hard and fast rules. For some securities, you might prefer to adjust up or down if the stock you’re watching keeps bumping around 70 or 30.

RSI can also indicate trends. When RSI makes higher highs and higher lows, or lower lows and lower highs, it can signal a trend forming.

How to use RSI

Here’s the formula you can use for calculating RSI:

RSI = 100 – [100 / (1 + (Average of Upward Price Change / Average of Downward Price Change ) ) ]

The period used to calculate the price changes is typically 14 days, but this can be lowered to increase the sensitivity or raised to decrease the sensitivity to daily price movements. It’s not that complicated, but don’t worry—you won’t need to do any math to use RSI.

You can add RSI to your charts in Fidelity’s brokerage trading platform, Active Trader Pro® by opening a chart and clicking Indicators on the main menu. Find RSI and click on it to add it to your chart. From Fidelity.com, on the stock snapshot page, open the Indicators menu over the chart and select RSI.

Learn more

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print
Technical analysis focuses on market action—specifically, volume and price. Technical analysis is only one approach to analyzing stocks. When considering what stocks to buy or sell, you should use the approach that you're most comfortable with. As with all your investments, you must make your own determination whether an investment in any particular security or securities is right for you based on your investment objectives, risk tolerance, and financial situation. Past performance is no guarantee of future results.

Past performance is no guarantee of future results.

These comments should not be viewed as a recommendation for or against any particular security or trading strategy. Views and opinions are subject to change at any time based on market and other conditions.
Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

771005.4.0
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.