Lesson 48 of 69
RSI, MACD and Bollinger Bands
9 min read
Chapter checkpoints
0/3- RSI — Relative Strength Index
- MACD — Moving Average Convergence Divergence
- Bollinger Bands — volatility
Optional — tick a chapter as you finish it to keep your place inside this lesson.
These three cover the questions do not answer: how strong is the current move, is shifting, and is the market quiet or wild right now. Learn what each one measures, then use at most one or two — stacking five indicators just gives you the same opinion five times.
RSI —
RSI compares the size of recent up closes to the size of recent down closes over a lookback period (14 by default) and turns that ratio into a number between 0 and 100. High means buyers have dominated recently; low means sellers have.
- Above 70 is called , below 30 . That describes speed, not a — in a strong RSI can sit above 70 for weeks.
- The 50 line is an underrated trend filter: above 50 favours buys, below 50 favours sells.
- is the highest-value use: price makes a higher high but RSI makes a lower high, meaning the new high came with less force. Treat it as a warning, then wait for a to confirm.
— Moving Average Convergence Divergence
MACD is built from two EMAs. The MACD line is the difference between a fast and a slow , the signal line is a short average of the MACD line, and the histogram is the between the two. It measures whether momentum is expanding or fading.
- MACD line crossing above the signal line points to strengthening momentum; crossing below points to .
- The zero line matters: crossovers above zero in an are far more reliable than crossovers against the bigger trend.
- Shrinking histogram bars mean the current move is running out of steam even while price still ticks higher — a good reason to tighten a stop, not to reverse.
- Like RSI, MACD can diverge from price, and it is at its worst in markets.
—
Bollinger Bands plot a 20-period moving average with an upper and lower band placed a couple of standard deviations away. When the market is quiet the bands together; when it is volatile they expand.
- A squeeze means volatility is compressed and a larger move is often building — it tells you something is coming, not which direction.
- In a range, touches of the outer bands mark stretched prices where a reversion to the middle band is likely.
- In a strong trend, price can ride the upper or lower band for a long time. Selling every upper-band touch in an uptrend is a classic beginner loss.
- The middle band (the 20 ) often acts as dynamic and during trends.
| Indicator | Measures | Best used for |
|---|---|---|
| Moving averages | Direction and average price | Trend filter, pullback areas |
| RSI | Momentum strength (0-100) | Stretched conditions, divergence |
| MACD | Momentum expanding or fading | Trend shifts, exit timing |
| Bollinger Bands | Volatility around an average | Squeezes, range extremes |
How to add these without ruining your chart
Start with a clean chart and price action only. Add one indicator, trade it for a month, and keep it only if it changed decisions for the better. Two indicators that measure different things (a moving average plus RSI) beat four that all measure momentum.
The rule that outlives every indicator
No indicator tells you where to place your stop or how big your position should be — and those two decisions determine whether you survive. Price action and risk management first; indicators are the finishing touch.
Key takeaways
- RSI measures the speed and size of recent moves on a 0-100 scale.
- Overbought can stay overbought in a strong trend — it is not a sell signal.
- MACD compares two moving averages to show momentum shifts.
- Bollinger Bands show volatility, widening in fast markets and contracting in quiet ones.
Knowledge check
3 quick questions — your best score is saved to your progress.
1. What does RSI measure?
2. In a strong trend, an 'overbought' RSI usually means…
3. What do Bollinger Bands show?
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