The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are two of the most popular momentum indicators used by market timers. Understanding how to interpret and combine these indicators can provide valuable entry and exit signals.
Understanding RSI
The RSI measures the speed and magnitude of price changes on a scale of 0 to 100. Readings above 70 indicate overbought conditions, while readings below 30 suggest oversold conditions. However, during strong trends, RSI can remain overbought or oversold for extended periods. Divergences between RSI and price often provide the most reliable signals.
The MACD Indicator
MACD tracks the relationship between two moving averages of price. The MACD line, signal line, and histogram each provide different types of information. Crossovers between the MACD and signal lines generate buy and sell signals, while the histogram reveals the strength of momentum.
Combining RSI and MACD
When both indicators agree, timing signals become more reliable. A bullish signal occurs when RSI emerges from oversold territory while MACD makes a bullish crossover. Bearish signals are generated when RSI moves from overbought levels coinciding with a MACD bearish crossover.
Timeframe Considerations
Both RSI and MACD behave differently across timeframes. Shorter periods make indicators more sensitive but generate more false signals. Longer periods are more reliable but slower to respond. Multi-timeframe analysis, checking signals across daily, weekly, and monthly charts, provides the most comprehensive timing perspective.