RSI & MACD: Momentum Indicators Explained

Relative Strength Index (RSI)

Developed by J. Welles Wilder in 1978. RSI oscillates between 0 and 100.

Formula

RSI = 100 − (100 / (1 + RS))

Where RS = Average Gain / Average Loss over 14 periods.

Interpretation

• RSI > 70: Overbought — potential reversal or pullback
• RSI < 30: Oversold — potential bounce
• RSI 40-60: Neutral zone

Divergences

When price makes a new high but RSI does not → bearish divergence (weakening momentum).

When price makes a new low but RSI does not → bullish divergence.

MACD (Moving Average Convergence Divergence)

Developed by Gerald Appel. Three components:

1. MACD Line = 12-EMA − 26-EMA
2. Signal Line = 9-EMA of MACD Line
3. Histogram = MACD − Signal

Signals

• Bullish crossover: MACD crosses above Signal → buy signal
• Bearish crossover: MACD crosses below Signal → sell signal
• Zero-line crossover: MACD crossing 0 confirms trend change
• Histogram divergence: Similar to RSI divergences

Combining Both

• Use RSI to identify extreme conditions.
• Use MACD to confirm trend direction and crossovers.
• Neither indicator works well in choppy, sideways markets.
• Always combine with price action and support/resistance.

Common Mistakes

1. Buying just because RSI < 30 in a strong downtrend (it can stay oversold for weeks).
2. Ignoring the overall trend — momentum indicators work best with the trend.
3. Using default settings on every asset — adjust to your timeframe.