Summary
Beginner’s guide to RSI, MACD, and Stochastic indicators. Learn how traders use them to measure momentum, spot reversals, and confirm market trends.
Economic Data
📚 Deep Dive 📚
RSI, MACD, and Stochastic: Momentum Indicators Made Simple
After learning moving averages, the next step is momentum indicators. These tools don’t just tell you where price is — they tell you if the stock is moving too fast, slowing down, or ready to reverse.
The three most popular are RSI, MACD, and Stochastic Oscillator. Let’s break them down.
📊 Relative Strength Index (RSI)
RSI measures whether a stock is “overbought” (too high too fast) or “oversold” (too low too fast).
- The scale runs from 0 to 100.
- Above 70 = overbought → price might pull back.
- Below 30 = oversold → price might bounce up.
- Middle around 50 = neutral.
👉 Example: If Tesla’s RSI is at 80, it means buyers have been too aggressive — a pullback may be near. If it’s at 25, sellers may be exhausted, and a bounce could happen.
⚡ Tip: Don’t use RSI alone. A stock can stay overbought or oversold longer than you think. Always check with trend and support/resistance.
📈 MACD (Moving Average Convergence Divergence)
The MACD is like a “trend strength meter.” It uses two moving averages to show momentum.
- MACD Line = the difference between a short-term and long-term moving average.
- Signal Line = a moving average of the MACD line (slower).
- Histogram = bars that show the gap between the MACD line and signal line.
How to read it:
Crossovers
- When MACD line crosses above the signal line → bullish signal.
- When MACD line crosses below the signal line → bearish signal.
Above or below zero line
- Above = bullish trend momentum.
- Below = bearish trend momentum.
👉 Example: If the MACD crosses above the signal line while price is above the 200-day moving average, that’s strong confirmation of a bullish trend.
🔄 Stochastic Oscillator
The Stochastic indicator compares a stock’s closing price to its recent range.
- The scale runs from 0 to 100.
- Above 80 = overbought.
- Below 20 = oversold.
- Often shows signals earlier than RSI.
It has two lines: %K (fast) and %D (slow). When they cross, it can signal a change in momentum.
👉 Example: If Microsoft is near support, and Stochastic rises from 15 to above 20 (with %K crossing %D), it’s a bullish hint.
📖 Using Them Together
- RSI = “speedometer” (is price overbought or oversold?)
- MACD = “engine check” (is trend gaining or losing momentum?)
- Stochastic = “early warning system” (shows shifts before RSI sometimes).
Traders often use these together to confirm signals.
👉 Example: If RSI is oversold, MACD is crossing up, and Stochastic is turning up — that’s a stronger case for a bounce.
🚫 Common Mistakes
- Using momentum indicators alone without price action.
- Forgetting that “overbought” doesn’t mean “sell right away” (trends can run longer).
- Treating crossovers as guarantees — they are clues, not certainties.
Quick Takeaways
- RSI shows overbought/oversold.
- MACD measures trend strength and momentum.
- Stochastic compares closing price to recent range for early signals.
- Best when combined with support, resistance, and moving averages.
Momentum indicators give traders a feel for how strong or weak a move is — helping to avoid chasing tops or bottoms.
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