RSI and MACD: How to Read These 2 Technical Analysis Indicators
Open the chart of a stock on almost any platform and 2 names come up again and again: the RSI and the MACD. They often intimidate beginners, because they appear as colored lines under the price, with English jargon and numbers that have no unit. Yet their logic is simple: they are mathematical summaries of what the price has just done. This article explains what they measure, how they are read, why they are regularly wrong, and why neither should ever be looked at on its own. The tone is purely descriptive: an indicator describes the recent past of a price, it predicts nothing.
What a Technical Indicator Measures (and What It Doesn't)
A technical indicator is a formula applied to market data: essentially prices and, sometimes, volumes. It turns a series of prices into a line that is easier to read.
2 ideas to keep in mind:
- An indicator is derived from price. It brings no new information: it restates what the price has already done, from a particular angle (speed, trend, intensity).
- An indicator lags. It is calculated on past periods, so it always reacts after the fact, more or less late depending on its settings.
The RSI and the MACD belong to the family of momentum indicators: they try to describe the speed and drive of price changes, not the absolute price level.
The RSI: Measuring the Strength of Recent Gains
The RSI (Relative Strength Index) compares the size of gains and losses over a period, 14 sessions by default. It is expressed on a scale from 0 to 100.
RSI = 100 − 100 / (1 + RS), where RS is the ratio of the average gain to the average loss over the period.
Illustrative worked example: over 14 sessions, a fictional stock gained 1.2% on average on up days and lost 0.8% on average on down days. RS = 1.2 / 0.8 = 1.5. The RSI is therefore 100 − 100 / 2.5 = 60.
How It Is Read
By convention, 3 zones are usually marked:
| RSI value | Usual descriptive reading |
|---|---|
| Above 70 | Very pronounced recent gains: described as an "overbought" zone |
| Between 30 and 70 | Intermediate zone, no particular extreme |
| Below 30 | Very pronounced recent losses: described as an "oversold" zone |
Mind the vocabulary: "overbought" does not mean the stock will fall, and "oversold" does not mean it will rebound. These words simply describe a recent move that was intense. In a solid uptrend, a stock can stay above 70 for weeks.
The MACD: The Distance Between 2 Moving Averages
The MACD (Moving Average Convergence Divergence) relies on 2 exponential moving averages, meaning averages that give more weight to recent sessions. To go deeper on this concept, the lesson Moving averages explains how they work.
The MACD has 3 components:
- The MACD line: the 12-session exponential average minus the 26-session exponential average. When it is positive, the fast average is above the slow one.
- The signal line: a 9-session exponential average of the MACD line. It smooths the MACD line.
- The histogram: the gap between the MACD line and the signal line, drawn as bars.
How It Is Read
- Crossover of the MACD line and the signal line. When the MACD line moves above the signal line, the recent upward drive is strengthening; when it moves below, it is fading. This is the most common descriptive reading.
- Position relative to zero. A MACD line above zero means the fast average is above the slow average, so the recent trend is pointing up.
- Size of the histogram. Shrinking bars show that the drive is losing intensity, even if the price keeps rising.
False Signals: Why These Indicators Get It Wrong
No indicator is 100% reliable, and these 2 have well-known weaknesses.
- In a market with no trend, the MACD keeps crossing its signal line back and forth: each crossover seems to "mean" something, while the price is going nowhere. These are whipsaws, or false alarms.
- In a strong trend, the RSI stays in extreme zones for a long time. Reading "oversold" during a prolonged decline has no predictive value: the decline can continue.
- Lag: the MACD, built on averages, often confirms a move when a large part of it is already over.
- External events: an earnings release, a central bank decision or unexpected news distorts the price abruptly, and indicators do not anticipate them.
- The choice of settings: 14 and 12-26-9 are conventions, not laws. Changing these values changes the lines, and therefore the "signals".
Finally, remember that past performance is no guarantee of future results: that a pattern "worked" in a stock's history does not mean it will work again.
Why You Should Cross-Check Several Pieces of Information
Since each indicator has blind spots, the usual approach is to cross-check several sources rather than rely on a single line:
- With the trend: support, resistance and moving averages provide the context in which to read the RSI or MACD (see Trends, supports and resistances).
- With volumes: a move backed by heavy volume is generally more meaningful than one made in indifference.
- With fundamentals: a chart says nothing about a company's health. Valuation, profitability and debt, as in the article on the P/E ratio, usefully complement the technical view.
- With the time horizon: a signal on a 5-minute chart does not carry the same weight as one on a weekly chart.
When several independent readings point the same way, the whole picture is more informative; when they contradict each other, the contradiction is itself information. For a complete method, How to analyze a stock shows how to combine the different approaches. The lesson RSI, MACD, ADX goes further into these indicators, and Japanese candlesticks and reading a chart lays the foundations for reading a price chart.
Key Takeaways
- The RSI measures the strength of recent gains and losses on a scale of 0 to 100; the MACD measures the gap between a fast and a slow moving average.
- They are descriptive tools: they summarize the recent past of the price, they do not predict where it goes next.
- False signals are frequent, especially in markets with no trend, and the thresholds (70 / 30, crossovers) remain conventions.
- No indicator should be read alone: trend, volumes, fundamentals and time horizon should be cross-checked.
- On an Earnnest stock page, these indicators are shown with their context and a descriptive verdict (bullish, neutral or bearish), so they are not read in isolation. Open a stock page to see how they combine.
This article is for informational and educational purposes only and does not constitute personalized investment advice.