RSI and MACD are two popular technical indicators when trading cryptocurrencies. It provides clear signals to investors. So what is the combination strategy using RSI and MACD? What are the steps to perform combined transactions? Let’s find out in detail about Crypto Trading through the article below about these two indicators.
Basic concepts of RSI and MACD you should know
Moving average convergence divergence (MACD) and relative strength index (RSI) are two very popular momentum indicators in trading. They are capable of providing accurate trading signals to traders. Let’s learn the basic concepts of RSI and MACD.
What is RSI?
Relative Strength Index (RSI) is an important technical analysis tool in cryptocurrency trading. It measures price fluctuations over a specified period. This helps identify overbought and oversold signals in the market.
The value of RSI is always between 0 and 100. When the RSI moves above 70, this is considered an overbought zone. That means the price has increased too quickly and will likely adjust downward soon. Conversely, when RSI falls below 30, this is the oversold zone. It shows that the price has fallen too sharply and may recover soon.
Monitoring and analyzing the RSI indicator will help traders determine the right times to enter buy or sell orders.
What is MACD?
What is MACD indicator? MACD (Moving Average Convergence Divergence) is a popular technical indicator used to analyze price trends. It is based on the interaction between two exponential moving averages (EMA). This helps traders identify potential opportunities on the price chart.
Unlike the RSI indicator, MACD does not have a fixed oscillation limit such as 0-100. MACD fluctuates around 0, reflecting the strength of price trends. When MACD fluctuates above zero, it shows that the uptrend is dominant. Conversely, when MACD falls below 0, this is a sign of a downtrend.
In addition to the MACD indicator and RSI indicator, traders can learn more about the Parabolic SAR indicator. It helps determine the ending and reversal points of a price trend. This indicator also helps traders identify potential buying and selling points in the market. Mastering What is parabolic sar will help traders effectively combine with RSI and MACD to make accurate trading decisions.
See more: Know MACD for perfect crypto transactions
Compare the similarities and differences of MACD RSI
RSI and MACD are two very powerful and commonly used technical analysis indicators. They can support each other to provide more accurate and reliable signals for investors.
What are the similarities between RSI and MACD?
These are all powerful technical analysis indicators, commonly used by many traders. It has some similarities as follows:
Both of these indicators are capable of detecting market reversal signals accurately. It helps investors identify trends and price fluctuation ranges. Due to the sensitivity of RSI and MACD, many traders choose to use both indicators together. This is to increase the reliability and authenticity of signal information.
Additionally, it is also useful in identifying divergence and convergence patterns. When combining and analyzing, investors can grasp more ideal trading opportunities.
Differences between the two indicators
Indicator RSI and MACD have different characteristics and operating principles:
Operating principle:
- RSI is a “Leading” indicator, reflecting current developments in the market.
- MACD is considered a “Lagging” indicator, giving signals based on previously confirmed information.
Accuracy:
- Signals from RSI are highly noisy and should be carefully monitored to avoid disadvantages.
- MACD provides signals with greater accuracy.
Characteristic:
- RSI signals are predictive and often precede market movements.
- MACD signals are evaluative and often come after market developments.
What is the relationship between indicator RSI and MACD?
RSI (Relative Strength Index) and MACD (Moving Average Convergence Divergence) are two popular technical indicators related to EMA moving averages. MACD is calculated based on EMA, specifically the difference between EMA 12 and EMA 26. The MACD signal is also confirmed by the signal line, i.e. EMA 9.
RSI uses the average price increase and decreases over a period (usually 14 days) to measure the strength of a trend. EMA represents the average price of the market during a certain period. These two indicators both work based on price trends.
RSI and MACD reflect various factors. Sometimes they can give conflicting signals. For example, when RSI is above 70 for an extended period, it indicates the market is overbought. But MACD continuously cuts and stays above the signal line, implying that the market still has the potential to increase in price. In this case, investors should be cautious and limit transactions.
How to determine the main trend with MACD and entry points with RSI
When combined with RSI and MACD, investors can identify buy and sell signals more accurately.
Identify the main trend with MACD
Use MACD to determine the general trend of the market. If the MACD line is above the signal line and sloping up, the general trend is up. Conversely, if the MACD line is below the signal line and sloping down, the general trend is down.
MACD is a powerful momentum indicator that can be applied in many ways in trading:
- Investors can use the crossover signal between the MACD line and the Signal line to determine the price trend. MACD crosses the Signal line from below, this is a signal that the price will increase, and you can enter a buy order. MACD cuts Signal from top to bottom, this is a signal that the price is decreasing, and you can enter a sell order.
- MACD is also a strong momentum indicator, which can be used to confirm candlestick reversal patterns before entering a trade, similar to RSI.
- Use MACD to identify divergence and convergence between the market price and the MACD line. Divergence is when price makes a new higher high but MACD makes a new lower high. Convergence is when price creates a new lower low but MACD creates a new higher low.
Identify entry points with RSI
When the primary trend is up (MACD crosses above the signal line), look for buy entry points when the RSI falls into the oversold zone (below 30) and then returns above 30.
When the primary trend is down (MACD crosses below the signal line), look for short entry points when the RSI rises to the overbought zone (above 70) and then falls back below 70.
RSI is a powerful momentum indicator that can be applied in many different ways:
- When the RSI is below 30, the market is considered oversold and investors should consider buying. On the contrary, when RSI is above 70, the market is considered overbought, which is the appropriate time to look for sell orders.
- RSI can validate signals from candlestick reversal patterns. Combining RSI and candlestick patterns helps to trade more effectively.
- Divergence occurs when price creates a new higher high but RSI creates a lower high. Conversely, convergence occurs when price creates a lower low but RSI creates a higher low.
See more: Opening an Bybit exchange account for traders
Advantages and disadvantages when combining RSI and MACD
Although the combined use of RSI and MACD has its advantages, it also comes with certain limitations that need to be considered and managed effectively.
Advantage
The advantages of this indicator combination strategy are as follows:
- More accurate signals: Simultaneous use of RSI and MACD helps provide more accurate order entry signals and position determination than relying only on a single indicator.
- Flexibility in choosing time frames: Investors can choose many time frames that suit their trading style. Not limited to high hourly frames to ensure the accuracy of RSI signals.
- Better risk management: Both indicators are very sensitive to market reversals. Therefore, if you notice a reversal signal from either indicator, investors need to quickly exit the order to ensure safety.
Defect
Disadvantages of the strategy combining these two indicators:
- Only enter orders when there is signal consistency: Using them simultaneously means that investors can only optimize trades when both indicators give the same signal. If the signals do not agree with each other, it will be impossible to determine the optimal time.
- Risk of false reversal signals: As emphasized, when used in combination, investors need to quickly exit orders when there is a reversal signal. However, if this reversal signal is fake, investors will miss great profit opportunities.
- Predictability is not perfect: Although the rate of predicting price trends can be higher than using just a single indicator. However, there is no guarantee that these signals will be 100% accurate. Therefore, investors still need to manage risk when using a combined strategy of RSI and MACD.
Epilogue
Using multiple technical indicators like RSI and MACD at the same time can bring many advantages. When combining indicators, traders can make the most of different signals to make decisions. However, effective application of this strategy requires extensive understanding and trading experience. New investors in the market need time to learn and practice the skills to use. Hopefully, the above article on Crypto Trading is useful to traders, especially newbies. And don’t forget to follow our articles to gain more investment experience!
Frequently asked questions?
What is the mistake when combining RSI and MACD?
Some common mistakes when using a strategy that combines indicators RSI and MACD are:
- Execute a buy order (BUY) when the market is in the oversold zone.
- Execute a sell order (SELL) when the market is in the overbought zone.
Why should we combine 2 indicators RSI and MACD?
There are two main reasons why investors often use combinations in their trading strategies:
- These two indicators complement and support each other
- Simultaneous use helps investors avoid false reversal signals. Because each indicator will have a different way of interpreting and confirming signals.
How to set up a combination strategy RSI and MACD What is it?
To set up a combined trading strategy using two indicators, it is necessary to prepare the following tools:
- Identify supply/demand zones on the price chart.
- Display the MACD indicator on the chart. MACD helps determine the general trend of the market.
- Look at the RSI indicators on the chart. RSI provides information about the overbought or oversold level of the market.
