Momentum indicators: RSI and MACD
Moving averages help describe price direction, while momentum indicators examine the strength and pace of price changes. This lesson introduces the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), explaining how to read them, compare their signals, and understand why neither can reliably predict the next market move.
What momentum measures
Momentum describes how strongly price is moving over a chosen period. A market can continue rising while its upward momentum weakens, just as a moving vehicle can slow down without immediately changing direction. Momentum indicators turn recent price changes into calculations that make these shifts easier to observe, although they do not explain what caused them.
Like the moving averages covered in the previous lesson, RSI and MACD use historical prices. They organise information rather than provide certainty about future prices. Their readings depend on the chart timeframe and calculation settings: a daily chart may show strong upward momentum while a five-minute chart shows a short-term decline. These readings describe different observation windows, not necessarily contradictory evidence.
Reading RSI
RSI is an oscillator that moves between 0 and 100. A common setting is 14 periods, meaning 14 candles on the selected timeframe. Its calculation compares smoothed average gains with smoothed average losses. Readings above 70 are commonly called overbought, while readings below 30 are called oversold. These labels describe recent momentum; they do not establish whether an asset is fairly valued.
Overbought does not mean price must fall, and oversold does not mean it must rise. During a strong trend, RSI can remain near an extreme for an extended period. The 50 level offers another reference: readings above it indicate that average gains exceed average losses in the calculation, while readings below it indicate the reverse. None of these levels is a guaranteed turning point.
Reading MACD
MACD compares two exponential moving averages (EMAs), connecting directly to the previous lesson. With common settings of 12, 26 and 9, the MACD value equals the 12-period EMA minus the 26-period EMA. A signal line smooths that value over nine periods. Positive MACD means the shorter EMA is above the longer EMA; negative MACD means it is below.
A crossover occurs when MACD moves above or below its signal line. It can indicate a change in momentum, but may appear after a substantial price move or reverse repeatedly in sideways markets. Display conventions also matter: MT5's standard MACD plots the MACD value as bars with a signal line. Many other versions instead plot a separate histogram showing the difference between MACD and its signal line.
Worked example: two readings
Consider a hypothetical EURUSD chart where the RSI calculation produces a smoothed average gain of 0.0006 and a smoothed average loss of 0.0003. Relative strength is 0.0006 ÷ 0.0003 = 2. Using RSI = 100 − [100 ÷ (1 + relative strength)], the result is approximately 66.7. Gains outweigh losses in this calculation, but RSI remains below the conventional 70 threshold.
On the same hypothetical chart, suppose the 12-period EMA is 1.0850 and the 26-period EMA is 1.0830. MACD is therefore 0.0020, equivalent to a 20-pip distance between the averages. If the signal line is 0.0015, MACD is above it by 0.0005, or five pips. Together, these readings describe positive momentum; they neither establish a crossover without earlier readings nor predict a particular price increase.
Context, limitations and MT5
Divergence occurs when price and an indicator move differently. For example, price may form a higher high while RSI or MACD forms a lower high, suggesting that upward momentum is weakening. However, divergence can persist without a reversal. RSI and MACD also share price as their main input, so agreement between them is not independent proof that an interpretation is correct.
In MT5, RSI and MACD can be added from the indicator menu, with inputs adjusted in their settings. Shorter calculation periods generally respond faster but produce more fluctuations; longer periods smooth readings but react more slowly. Interpretation benefits from broader context, including trend, volatility and the chart patterns introduced next. Indicators do not remove trading risk: CFDs are leveraged products and carry a high risk of loss.
- Momentum measures the strength of price changes, not a guaranteed future direction.
- RSI extremes do not automatically signal reversals.
- MACD compares moving averages; check how its bars are displayed.
- Crossovers and divergence need context and cannot remove leveraged CFD risk.