The relative strength index (RSI) and moving average convergence divergence (MACD) are two of the most popular technical indicators used by traders. In this article, we will explore how to use RSI and MACD together, and how combining these two tools can provide valuable trading signals.
What is RSI?
The relative strength index (RSI) is an oscillator that measures the speed and change of price movements by evaluating the ratio of shorter-term average gains to longer-term average losses. The RSI ranges from 0 to 100, with readings above 70 generally considered overbought and below 30 considered oversold. Traders use the RSI to identify when assets may be due for a trend reversal by looking for divergences or signals of extreme overbought/oversold conditions.
What is MACD?
The moving average convergence divergence (MACD) is a trend-following momentum indicator showing the relationship between two moving averages of prices. The MACD is calculated by subtracting a longer-term moving average (typically 26 days) from a shorter-term moving average (typically 12 days). A nine-day exponential moving average is then applied to the MACD, called the “signal line.” Traders look for crossovers of the MACD line and signal line or divergences as trading signals.
Combining RSI and MACD for Analysis
By learning how to use RSI and MACD together, traders can gain a more complete picture of an asset’s price momentum and trends. Here are some effective ways to combine these indicators:
- Look for divergences between price action and either indicator for signal confirmation. For example, a new high in price with a lower high in RSI/MACD often represents an impending reversal.
- Monitor the RSI for overbought/oversold readings and use MACD confirmations like crossovers as trigger points to enter trades. This helps filter out whipsaws.
- Corroborate bullish/bearish signals by checking if both RSI and MACD are aligned, rather than relying on a single indicator. Two concurring signals improve reliability.
- Consider RSI and MACD moving in tandem as validation of the current trend’s strength, while divergences may flag upcoming trend changes.
- Set up trading systems that only trigger when specific RSI and MACD conditions are met simultaneously like RSI crossing 30 or MACD crossing signal line.
Combining these indicators effectively provides multiple perspectives on momentum, helping identify high-probability trade setups with greater accuracy. Let’s explore a few practical examples.
Example 1: Using RSI and MACD for Trend Confirmation
A trader notices that GBP/USD has risen significantly from its recent lows. However, while the price continues trending up, both RSI and MACD on the daily chart have formed bearish divergences by printing lower highs.
This signals the current uptrend may be weakening. The trader sees an opportunity for a short position, but holds off until RSI drops back below 50 and MACD crosses below its signal line – now having trend change confirmations from both indicators. The signals align, and a well-defined top is formed, leading to a profitable short trade.
Example 2: Using Overbought/Oversold Signals
After a prolonged downtrend in gold prices, the daily RSI dips into oversold territory below 30. A few days later, the MACD crosses into positive territory on its signal line crossover.
Taking both signals into consideration, the trader enters a long position, expecting an oversold bounce. Gold prices then rebound sharply as buying pressure increases on the technical breakout. The trader takes profits after the RSI returns to neutral 50 territory from its extremely oversold level.
These examples show how combining different aspects of RSI and MACD readings – like divergences, overbought/oversold levels, and crossovers – leads to higher-conviction trade entries. But there are additional enhancements that can be made.
Enhancing RSI/MACD Signal Combinations
Many traders get better results by further tweaking how they combine RSI and MACD signals. Here are some enhancements to consider:
- Apply different timeframes – confirm daily chart signals with weekly/monthly readings for stronger trends.
- Tweak indicator parameters – some find 14-period RSI or variable MACD work better than defaults.
- Use smoothing/filtering – only trigger in the direction of a simple/exponential moving average trend.
- Add volume analysis – trade in the direction of heavier volume surges for more reliable breaks.
- Incorporate Fibonacci levels – Fine-tune entries based on retracements/extensions of key moves.
- Backtest combinations – Optimize the specific rule-based conditions that generate the highest accuracy.
- Monitor pullbacks and retests – Enter after pullbacks that retest technical breakout points.
With refinement, traders can maximize the synergies between RSI and MACD to spot high-probability reversals and continuation patterns more methodically. Let’s see a final example:
Example 3: A Refined, Backtested Approach
An investor notices the weekly RSI on silver breaking out of a long-term downtrend, confirming an early-stage bull trend. However, she holds off entry until seeing a bullish MACD crossover on the daily chart following a 38.2% Fibonacci retracement of the last leg.
The crossover triggers a long entry, and she sets a trailing stop below the most recent swing low. Over repeated backtesting of this specific combination of factors, it generates a win rate above 65% on silver. The investor deploys it going forward with confidence.
Conclusion | How to Use RSI and MACD Together
Mastering how to use RSI and MACD together takes understanding each indicator and how they provide unique insights. Combining them optimally helps alleviate some issues like whipsaws and generates trading signals with improved accuracy. With refinement techniques like parameter adjustments, timeframe blending, Fibonacci applications, and backtesting, traders can systematically spot high-probability reversals and continuation moves on many different markets. As with any technical approach, consistent review and enhancement over time helps maximize performance.
