How the MACD indicator is calculated
The MACD indicator consists of two lines: the MACD line and the signal line. The MACD values (which are plotted as the MACD line) are calculated by subtracting the value of a 26-period EMA from a 12-period EMA, while the signal line is gotten by calculating a 9-period EMA of the MACD values.
As the 12-period EMA is constantly converging toward, and diverging away from, the 26-period EMA, the MACD values are converging toward, and diverging away from, zero.
In essence, the MACD line oscillates above and below the zero level. The signal line, which is a 9-period EMA of the MACD line, oscillates around the MACD line. Sometimes, the MACD line (or in some cases, the difference between the MACD line and the signal line) is plotted as a histogram.
Refer for this article for more information
How MACD is interpreted
Here are the common interpretations of the MACD indicator:
- The MACD line rising above zero is considered bullish, while falling below zero is bearish. That is, when MACD turns up from below zero it is considered bullish, and when it turns down from above zero it is considered bearish.
- The MACD line crossing from below to above the signal line is considered bullish — the further below the zero line the earlier the signal. Conversely, the MACD line crossing from above to below the signal line is considered a bearish signal, and the further above the zero line, the earlier the signal.
- A divergence signal occurs when the MACD line and the price swing are not in sync, with either making a higher high or lower low when the other is not making the same.
Note that in a range-bound market, the indicator will whipsaw, with the MACD line crossing back and forth across the signal line. It may be best to avoid using the indicator in this situation or even avoid trading at all until the market direction is clear.
What is RSI?
Developed by J. Welles Wilder, the RSI is a momentum oscillator that measures the speed and change of price movements.
The indicator consists of a single line that oscillates between zero and 100. Traditionally, when the RSI is above 70 and overbought, the market is considered overbought, and when it is below 30, the market is considered oversold.
Apart from the overbought/oversold signals, divergences and failure swings can be interpreted as signals. Some even use higher-period RSI to identify the general trend.
How the RSI indicator is calculated
It requires a multi-step calculation:
- Step 1: calculating the Up days and Down days
- Step 2: Calculating the relative strength RS by dividing a smoothed moving average (SMMA) of the Up by the SMMA of the Down days
- Step 3: Computing the RSI from the RS using this formula: RSI = 100 — [100/(1+RS)]
How RSI is interpreted
- Overbought/oversold signal: When the RSI is above 70 and overbought, the market is considered overbought, and when it is below 30, the market is considered oversold. However, you can adjust the levels if necessary to better fit the market you want to trade. For example, if the market is repeatedly reaching the overbought level of 70, you may want to adjust this level to 80. But note that during strong trends, the RSI may remain in an overbought or oversold region for extended periods.
- Divergence signal: This happens when the market makes a new high or low that isn’t confirmed by the RSI, and it can signal a price reversal.
- Swing failure: If the RSI makes a lower high and then follows with a downside move below a previous low, a Top Swing Failure has occurred. If the RSI makes a higher low and then follows with an upside move above a previous high, a Bottom Swing Failure has occurred.
- Gauging the trend: In an uptrend or bull market, the RSI tends to remain in the 40 to 90 range with the 40–50 zone acting as support. On the flip side, during a downtrend or bear market, the RSI tends to stay between the 10 to 60 range with the 50–60 zone acting as resistance. These ranges will vary depending on the RSI settings and the strength of the market trend.
- RSI patterns: RSI also often forms patterns, such as double tops or bottoms, as the price swings. These RSI patterns may signal a potential price reversal.
MACD trading examples
Take a look at the chart below. You can see that the MACD follows the momentum of the market very well. It rises as the market rises and falls as the market falls. We labeled just two signals to show this example.
The first one is a long signal that was generated when the MACD line rose above the signal line, far below the zero level. You can see the price bar where a trade would have been entered. By the time the MACD turned below the signal line after rising far above the zero level (a short signal), a lot of profit would have been made. Even the short signal produced a good price decline from the end of August to the beginning of October.
RSI trading examples
From the chart above, you can see that the RSI rose to the overbought region and then descended from there, which was a signal to short the asset. The signal played out well. By the time the RSI fell into the oversold region and created a buy signal, you would have made a lot of profit. Notice that without a sizeable stop loss, the buy trade would have been stopped out before the price rose. Finally, note the divergence signal that just occurred is playing out at the moment.
Combine MACD and RSI to confirm price momentum.
The simplest application of these indicators can offer a lot of insight and clarity when it comes to price momentum. If one indicator signals momentum in a certain direction, check the other indicator to see whether it agrees. If their views are split, you may struggle to reach a conclusion that gives you enough confidence to open a position. When both agree, though, traders may feel more confident taking action.
In the NZD/USD chart below, RSI and MACD both signal momentum shifts in close proximity to one another. In both cases, the RSI slightly leads the MACD. Traders watching this currency pair closely might identify RSI’s signal, then wait to see if MACD aligns — and potentially open or close a position as a result.
Exit a position when MACD and RSI diverge.
In the same way that traders may open positions when MACD and RSI indicators confirm one another, traders may choose to close out a position when one of these indicators signals a shift in momentum.
Depending on your individual trading strategy, the rationale behind this decision can vary. Some traders will argue that the divergence of one indicator weakens the signal of the other indicator. Others may feel that one signal’s change of momentum may be a harbinger of the other signal’s change of direction and a corresponding shift in price movement.
don’t forget to use stop-losses for risk management.
Claim Discount
As a valued reader, this offer for you to elevate your trading experience. new users can usually claim a 30-day free trial of TradingView’s premium also you get discount on trading fees using thes Cryptocurrency exchange platform :
