Forex indicators: RSI and MACD

RSI (Relative Strength Index):

The reason the Relative Strength Index (RSI) is so widely used is because of its easy-to-use measuring system. It RSI compares the amount of recent gains to the amount of recent losses and translates that into a number between 0 and 100.

Another strength of the RSI is the fact that it has many uses. You can use it:
A) to confirm centerline crossovers
B) to spot divergences that show a trend is fading
C) to identify Overbought/Oversold levels.

A - Overbought/Oversold

When the RSI reaches 70 that is usually a strong indicator that a currency pair has peaked in value and is overbought. Conversely, when RSI is at 30 or below that is usually an strong indicator that a currency pair has bottomed out in value and is oversold.

Traders often consider to the time an RSI rises above 30 as a bullish period or a good time to buy. When the RSI dips below 70, it is a bearish period, or a good time to sell.

There are traders who like to identify a long-term trend by using extreme reading as entry points to buy or sell. When the long-term trend of a currency pair is bullish the RSI is usually near 30 and some traders consider this a good entry point.

B - Divergences

Another way to find signals to buy or sell is by locating divergences, positive or negative, between the RSI and the currency pair price.
A bearish divergence occurs when the currency pair price peaks but the RSI does not. On the other side when hits bottom but the RSI doesn't that's known as a bullish divergence.

C - Centerline Crossover

The centerline of the RSI is 50. A reading above that number reflects the fact that gains are higher than losses, while a reading below 50 reflects the opposite, losses outpacing gains.

Some traders pay close attention to the centerline as they view an RSI above 50 as a confirmation of bullishness. Conversely, they view an RSI below 50 as a confirmation of bearishness.

MACD

One great way to use MACD (besides the divergences already explained with the RSI) is as a confirmation indicator. For example, if the MACD chart reads above 0 an uptrend is occurring. If it's below 0, we're in the middle of a downtrend.

When the market is having strong trends this is a good indicator of trends. But when the market is inconsistent using MACD is probably not a good strategy. Your best bet is to use MACD histogram above or below 0 as a confirmation of the buy and sell signals of other indicators.

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