MACD and RSI Indicator for Stock Trading

Price indicators are popular among technical traders, so this material will give you a basic understanding of two of the most commonly used indicators: MACD and RSI.

As a brief notice, as a beginner you should understand that you should use a technical strategy for stock trading only if it’s about liquid assets. Price indicators, statistically perform poorer in low liquidity environments, so take that into account as well.

MACD – Moving Average Convergence/Divergence

This indicator is part of the oscillators’ family and it is one of the most effective momentum indicators available. It uses two moving averages and subtracts the longer MA from the shorter MA. The value fluctuates above and below the zero line as the two MAs converge, diverge and cross. One of its main functions is to spot overbought and oversold conditions.

effectiveness of the MACD

Looking at our chart above, you can see the effectiveness of the MACD in terms of spotting the oversold and overbought areas. The squares are used to highlight those spots and after each one the market moved in the opposite direction.

The basic setup for this indicator is (12, 26, 9), meaning we have three different exponential moving averages. The 9 EMA is the one plotted with the indicator to act as a signal line and identify turns.

RSI – Relative Strength Index

The second indicator we want to talk about is the RSI, another momentum oscillator, developed by Welles Wilder, which is used to measure the speed of price movements. Compared to the MACD, it oscillated between the values 0 and 100.

It also had oversold and overbought area. A value above the 70 mark is considered as overbought, while a value below the 30 mark is considered as oversold.

MACD with RSI

Above we have the exact chart we used when describing the MACD and you can see that the RSI managed to spot the same overbought and oversold conditions.

As mentioned in the beginning, you can use the above indicators for stock trading and keep in mind that trading liquid assets will give you an edge.

Risk Warning and Disclaimer

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. No information or opinion contained on this site should be taken as a solicitation or offer to buy or sell any currency, equity or other financial instruments or services. Past performance is no indication or guarantee of future performance.

 

Tags: