The objective of every forex trader is to become a profitable trader. But achieving this goal is not always an easy task, so it’s vital that you learn how to use as many of the technical indicators as you can. These indicators are very useful parameters that will tell you with a pretty high probability what the forex markets are more likely to do in their apparently disordered behavior.
MACD and RSI are two of these indicators; but what’s the meaning of these letters? Here is the answer:
Moving Average Convergence Divergence: MACD is a more detailed method of using moving averages to find trading signals. This indicator was developed by Gerald Appel, the MACD plots the difference between a 26-day exponential moving average and a 12-day exponential moving average. A 9-day moving average is generally used as a trigger line, this means that when the MACD crosses below this trigger it is a bearish signal (time to sell) and when it crosses above it, it's a bullish signal (time to buy).
This indicator will help the trader using MACD studies to have an early signal of what the market will do next. When the MACD turns positive and makes higher lows while prices are still tanking, this is usually a strong buy signal. Conversely, when the MACD makes lower highs while prices are making new highs, this could be a strong bearish divergence and a sell signal.
The other indicator, RSI, stands for Relative Strength Index. The RSI indicator measures the markets activity as to whether it is over bought or over sold. It gives a trader an indication of which way the Market is moving at the moment. It is important to note, that this is a leading indicator and thus allows one to see what the market is about to do next and then act accordingly in order to have gains. The higher the RSI number, the more over bought it is and conversely the lower the RSI number, the more over sold it is. It is a great leading indicator for the micro and macro reversals in the forex market.
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