Relative strength index (RSI)

Technical analysts use a number of studies to determine when a stock has been overbought (which they interpret as a selling signal) or oversold (a potential buying opportunity).

You can use these same studies to determine whether or not you should think about buying or selling a particular stock. The relative strength index (RSI) is one of these studies.

The RSI measures the momentum of price movements in a stock based on high and low closing prices, and appears on a scale of zero to 100. It is charted over a set time period, commonly 14 days. A stock is considered to be overbought when the RSI exceeds 70; it is considered to be oversold when the RSI drops below 30.

The RSI can be used on its own or in conjunction with other technical studies to identify buying or selling opportunities. Many technical analysts combine the RSI study with a momentum study in order to compare buying and selling indicators that appear in one study with the buying and selling indicators appearing in the other before making a trading decision.

The RSI can also be applied to a stock market index to determine bullish or bearish trends in the market. Once one of these trends is identified using the RSI and is confirmed by momentum, some traders will make a decision to stay in cash or make short trades if they think the market is entering a bearish trend. Others, however, will deploy some of their cash to take long positions if they think the market is entering a bullish trend.