Friday, 11 May 2018

Details About MACD, Divergence and RSI

MACD (Moving Average Convergence/Divergence):

It is a trend following momentum indicator, ie a lagging indicator.

Formation:

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.

Signals:


  • 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.

Divergence:


  • 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.

Formation:


  • 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.

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