RSI, MACD and Bollinger Bands

These three cover the questions moving averages do not answer: how strong is the current move, is momentum 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 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 overbought, below 30 oversold. That describes speed, not a reversal — in a strong trend RSI can sit above 70 for weeks.
• The 50 line is an underrated trend filter: above 50 favours buys, below 50 favours sells.
• Divergence 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 candle to confirm.

MACD is built from two EMAs. The MACD line is the difference between a fast and a slow EMA, the signal line is a short average of the MACD line, and the histogram is the gap between the two. It measures whether momentum is expanding or fading.

• MACD line crossing above the signal line points to strengthening bullish momentum; crossing below points to bearish.
• The zero line matters: crossovers above zero in an uptrend 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 sideways 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 squeeze 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 SMA) often acts as dynamic support and resistance during trends.