Because two indicators measure different factors, they sometimes give contrary indications. Technical Analysis Basic Education. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile.
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Technicals Technical Chart. Commodities Views News. Forex Forex News. Currency Converter. Rate Story. Font Size Abc Small. Abc Medium. Abc Large. Getty Images. The MACD or moving average convergence divergence and RSI or Relative Strength Index are both trend-following momentum indicators that show the relationship between two moving averages of a stock.
These two indicators are widely used by both novice and experienced traders. The beauty of the RSI is that it can be combined with a number of other indicators and can support different trading approaches and strategies. We need to understand that RSI is a leading oscillator, which means it shows the potential future changes in the price of a stock or index.
The MACD, on the other hand, shows the strength of the trend as well as its direction. The MACD is the difference between a short and long exponential moving average usually day and day periods.
These MACD moves in and around the zero line. This gives MACD the characteristics of an oscillator, which results in overbought and oversold signals above and below the zero-line, respectively. The MACD indicator, on the other hand, could be used to hunt for trend signals in a trending market.
And as a trend reversal trader, you may find that RSI is a very useful tool. Another difference between these two indicators is the best way to use them. But be careful when using these two indicators, or any other indicator.
They all give false signals sometimes. The best way to cut your losses when this happens is to always set your stop loss. The Stop Loss Clusters indicator can come in handy here, as it helps you determine where other traders have set their stop losses. This will ensure that you are making trading decisions based on the most recent market data and that your signals are less skewed by outliers in the longer time frame. In this study, the researchers go on to cite previous studies in American and Japanese markets that further support this claim.
That being said, as a trader you must always remember that short-selling in itself comes with increased risk. Plus, in many asset classes, short selling is not an easy proposition for average traders. Hence, depending on the asset you are trading, short selling can be a complicated process.
But, if you are an advanced trader and you do decide to take a short position, there is statistical evidence indicating that you are likely to find better results relying on the MACD Indicator rather than the RSI Indicator. One such dimension that this study focused on was the overall profitability of trades based on signals from MACD and RSI, as the capital invested per trade increased.
At its core, this finding stemmed from the fact that, in this study, over a specified period of time, the RSI Indicator gave fewer but more accurate trading signals than MACD.
In cases where the RSI Indicator does signal a good time to buy or sell a security, on relative terms, taking trade actions often results in a profit. This makes the RSI a more effective indicator of momentum, in terms of profit over a longer duration of time.
During this phase, there is no meaningful rise or decline in the price of the asset. Typically, non-trending markets are riskier to trade than trending markets. But, when you do trade during this riskier market phase, as per the findings of this study by Business Perspective, the RSI Indicator will give you more reliable trading signals than the MACD Indicator.
Finally, I would also like to point out that even though this study rules in favor of the RSI indicator for trading non-trending markets, it also encourages you to pair technical analysis with fundamental analysis before making any trading decision. In this study, several technical indicators, including the Relative Strength Index, were found to work really well in conjunction with Fundamental Analysis.
Fundamental analysis techniques include looking at the current price of assets and comparing those prices to their ideal state value.
However, in this study, using RSI Relative Strength Index in combination with Fundamental Analysis did provide some degree of profit in every scenario. That being said, the overall conclusion of this study in reference was that technical analysis alone is insufficient in making profitable trading decisions.
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