In order to be successful in the forex market in the long run, you need to be able to have the tools to correctly and dependably predict market movements and price actions. No tools are better than technical indicators for this purpose. Among the most useful and widely applied indicators are the relative strength index or RSI and also the moving average convergence divergence known shortly as MACD. Because of their wide application and range of use, we have decided to compare these two with each other and see which one is better for the forex market.
What Is the Relative Strength Index?
RSI or relative strength index is a momentum oscillator. Before we go any further, here we need to clarify two concepts. Momentum and oscillator:
Momentum basically refers to the speed and strength of price change and price movements in the market.
Oscillator is a method of data representation in the market whereby the indicators oscillate or go back and forth between two extremes.
So, when we say the RSI is a momentum oscillator, it means it can help us understand the strength and speed of price movements in the market by oscillating between two extremes. The two extremes for the relative strength index are 0 and 100. And the way it is interpreted is exactly by the number to which it refers at any given moment.
When the RSI is above 70, it suggests that the market is in overbought conditions. This means it has been pushed too far in the bullish area and a bearish reversal or correction is highly likely.
On the other hand, when the RSI is below 30, then it means the market is in oversold condition. Clearly, it means bears have pushed too far and the market is prime for a bullish reversal or at least a correction.
The biggest advantage of the relative strength index is in its simplicity and ease of use. It can easily provide traders with information about when the market is overbought or oversold. In this way traders can make decisions about their upcoming price movements in accordance with price movements.
What Is the Moving Average Convergence Divergence?
Here we have another indicator which is also a momentum indicator. But it is not an oscillator. The moving average convergence divergence or MACD is made from two main moving average lines. The first one, known as MACD line, is the difference between two exponential moving averages or EMAs and the other one which is known as the signal line, which also happens to be an exponential moving average. The interpretation of the MACD indicator is then carried out based on the relationship between these lines.
When the MACD line goes above the signal line, then we can say it indicates a bullish signal and traders can adjust their positions accordingly, and possibly go long.
On the other hand, when the MACD line goes below the signal line, then it is indicative of a bearish signal and traders might want to go short.
Moving average convergence divergence is a tad more complex than the relative strength index, but by combining trend following and momentum analysis, it is able to provide traders with valuable and reliable information about the trajectory of trends.
Quick Comparison of RSI vs MACD
both the RSI and MACD deal with momentum and try to provide information with regard to price movements by analyzing this criterion. In the case of RSI, we also have conditions such as overbought and oversold taken into consideration. And in the case of the MACD we have trend following analysis as well.
Because MACD takes into account trend following factors as well, it is more reliable for when there is a strong trend in the market compared with the relative strength index. But the upside with the RSI is that the information you obtain from it is very quick and with minimal lag, whereas in the case of MACD you will have more lag due to information that ought to be obtained from the moving averages that make up the MACD.
So, as you can see in both cases there are strengths and weaknesses involved. In order to understand which one of these indicators is better for forex trading, let’s take a closer look at their individual applications and use cases.
When Should You Use RSI?
One of the key features of the relative strength index is that it can provide quick information to traders. So, it is quite useful for making fast decisions, thus making the RSI ideal for short term trading. This is when traders want to get quick signals for their positions.
Another application of the relative strength index is that it can be useful for when the market is moving sideways and there is not a single strong trend discernible. So when the market is moving sideways and it is difficult for you to decide which direction to place your positions, the RSI can help you find potentially profitable points for entry and exit.
When Should You Use MACD?
The moving average convergence divergence is an indicator that is particularly useful for trending markets. Because it takes into account trend following analysis, then it can be useful for there is a strong trend in the market.
Moreover, because it also uses moving averages, while it may not be quite useful for short term trading and providing quick signals, it can be applied for when the goal of trading is mid to long term.
Can You Combine RSI and MACD?
The short answer is yes. In fact, it is always recommended to use indicators in conjunction with each other as it can provide you with more confirmation and thus stronger and more reliable signals. So, in the case of the RSI and MACD, we can use them together to obtain confirmation as follows:
- For instance, when the RSI indicates the market is overbought and prime for a bearish reversal, and the MACD also shows the MACD line going below the signal line, it is strong bearish confirmation and you can adjust your positions accordingly.
- On the other hand, if the RSI indicates an oversold condition and pointing to the possibility for a bullish reversal, and at the same time the MACD is showing its line going above the signal line, then it is similarly a strong bullish sign.
As a general rule in forex trading, it is always a good idea to combine indicators, especially those that provide the same or similar type of information such as RSI and MACD. This will help provide you with confirmation of the analysis as well as reducing the chances of false signals.
Which Indicator is Better? RSI or MACD?
If you have been following the article carefully so far, you will be able to answer this question on your own. Given the applications of each of these indicators, they can be better than the other one given the specific conditions of trading.
RSI is better when the market is moving sideways and there is no strong and discernible trend, as it will be able to provide you with entry and exit signals even in sideways markets. The relative strength index is also more ideal for novice and less experienced traders, as it is much simpler to execute and analyze the results.
MACD is better when there is a discernible and strong trend in the market, as it is a trend following indicator, it can help you detect the strength and trajectory of the trend as it continues. This technical indicator is also more suitable for those traders who have more experience, as it is more complex and takes a bit of expertise to execute successfully.
Conclusion
In this article we took an in-depth look at two of the most popular and widely used technical indicators in the forex market, i.e. the relative strength index RSI and the moving average convergence divergence MACD. Our analysis was aimed at finding out more about these two tools and to decide which one is better for forex trading. In the end, we saw that neither of them can be considered as better than the other one. Given the conditions of trading, each can perform better than the other one. So ultimately it depends on the conditions of the market and also the trader. We also saw that, as with any other technical indicators that provide the same or similar data, combining RSI and MACD can provide traders with more reliable information.
