Using RSI to Assess Your Long-Term Holdings

Active traders often use technical analysis—the study of a stock's historical price patterns—to make buy or sell decisions. But some long-term investors might find certain technical tools useful, too.

One such tool is the relative strength index (RSI) indicator, which tracks the strength of a stock's gains versus losses over a certain number of trading days on a scale of 0 to 100. For most stocks, an RSI that pushes above 70 in that period may mean it's "overbought" and headed for a rough patch, whereas an RSI that dips below 30 generally indicates the stock is "oversold" and could be poised for a rebound.

"For a stock you already own, paying attention to its RSI can help you decide when to add more shares—or when to pull the plug," says Steven Greiner, managing director of Schwab Equity Ratings^® at the Schwab Center for Financial Research.

Say a stock you own has been on a tear and now accounts for an outsize portion of your portfolio. If you want to sell shares to rightsize your exposure, you might decide to wait to realize some gains until the stock's RSI breaks above 70, which could indicate the upward trend may soon be over.

You can use any time frame when assessing a stock's RSI, though active traders typically use shorter time frames—often 7 or 14 days—which are more sensitive to price changes but may give more false signals. "For longer-term investors, increasing the lookback period will reduce the sensitivity to price changes and produce fewer and possibly more-reliable signals," Steven says.

However, be aware that the overbought and oversold thresholds of 70 and 30 are just guidelines. "Our research has shown that many stocks operate in a narrower range," Steven says. "Thus, it's important to take into account a stock's historical price movements rather than blindly following potentially overbroad RSI targets."

In addition, using the RSI in conjunction with Schwab Equity Ratings could help identify promising new holdings for your portfolio. "In particular, our research has shown that stocks with an RSI near 30 and a Schwab Equity Rating of A or B may be prime prospects to consider," Steven says.

Finally, don't neglect a company's fundamentals. "For long-term holdings, company health is more important than short-term price moves," Steven says. "But if you're looking to make a change to your portfolio, the RSI indicator can help you decide when to take action."