MACD (Moving Average Convergence/Divergence):
It is a trend following momentum indicator, ie a lagging indicator.
There are two lines in MACD. One fast line and one slow line.
Both these lines oscillates above and below the “0” line, and given indication of trend.
- The basic MACD trading rule is to sell when MACD falls below its signal line.
- Correspondingly a buy signal happens when it increases above the signal line. Thus it is general to buy or sell when MACD goes above or sell zero levels.
- When slow line crosses above and slow the fast line, buy and sell signals are generated.
- When MACD is making a new high and price fails to reach new highs divergence occurs, similarly when prices makes new highs and MACD fails to make new highs, divergence occurs.
- Correspondingly when price make new lows and MACD does not divergence occurs giving a reversal signal.
MACD and Range:
- Based on various chart basis, one can observe that MACD tends to make support and faces resistance around particular levels established in past.
- These levels could be different for different stocks.
- With the change of phases, MACD can change range in which it moves.
- Depending on the price range, MACD tend to oscillate between respective ranges.
- In stocks of price range 1000 to 5000, MACD can oscillate between 100 and 500 or more range.
- When MACD is positive in monthly and weekly charts, trend remains intact.
- When price of an instrument makes a high, and MACD fails to make a new high, one must understand that bulls are in trouble and trend reversal is imminent. Such negative directions indicate trend change.
- Same way, when price makes a new low, but MACD does not make a new low, it indicates that bulls are getting stronger, and a positive trend reversal is imminent.
Relative Strength Index (RSI):
RSI is a price- following oscillator. As the name indicates it measures the relative strength of the stock.
- It ranges between 0 and 100
- It is important levels are 30, 50 and 70
Popular Tim Frame:
- 14 Days RSI is most popular in stock market.
- The few days used to calculate RSI more volatile the indicator.
Use of RSI:
RSI is primarily used for checking momentum, overbought and oversold range.
Signals obtained from RSI:
- RSI Tops above 70 and bottoms below 30
- Security is considered oversold below 30 levels
- Security is considered overbought above 70 levels
- When RSI remains above 50, instrument shows overall bullish trend.
- When RSI remains below 50, instruments shows overall bearish trend.
- RSI sometimes shows support and resistance levels more clearly than price charts.
- Divergence in RSI can be used as an impending reversal signal.
For example, if security is making a new high, but RSI fails to surpass the previous high, reversal signal is given.
- Prices usually correct ad move in the direction of the RSI.
With the help of RSI, one can get overbought and oversold state of a market or a share in a particular range.