the RSI ( relative strength index ) are two of the most
widely known technical indicators. But I am certain
most people do not know when to use one or the other.
Here is a simple explanation. You can read a lot about
these indicators at sites like stockcharts school. But
you will not know what I will write here, which is more
important than blindly digesting technical details.
The simple rule of thumb is, use the RSI in a ranging
market and MACD in a trending market. A ranging market
is one where the price keeps oscillating between two
levels, and this happens often, sometimes lasting for
months and even years. A trending market is like
the one of the Euro futures I showed in the post
on the classic trendline break.
In either market, use the respective indicator only
to time trades. The primary trade setup should still
be based on the technicals of the price/volume action
and a well-grounded fundamental knowledge on the time
period being considered for the trade. Within this
framework, you can use the RSI or MACD to tighten
your entry point.
Here is an example of the MACD in a trending market.
I suggest you look up charts of the Euro, Yen or
S&P500 for other RSI and MACD setups that have occured,
while keeping firmly in mind that if technical
indicators indicated oversold or overbought conditions
or trend changes correctly, then everyone in the world
would have been a successful trader!
Why did I say the above, after seeming to endorse the
use of the indicators in some capacity? The reason
will be clear as I expand on another subplot of this
blog, the self-fulfilling nature of technical analysis.
I am still thinking of a good name for it!
Thanks for your viewship.
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