RSI and MACD Strategy

The RSI is a popular forex indicator for spotting overbought and oversold market conditions. You can also use RSI divergence to get an idea of the direction in which a currency pair is heading. The MACD is another popular technical indicator that can confirm the trend direction and gauge its momentum. Whilst these are both good indicators in their own right, if you traded with the RSI or MACD on their own, you would probably get lots of false signals. Hence, when you combine them to form an RSI and MACD strategy, you can confirm the trading signals with each other. Add to that some price action analysis along with sensible money management, and you have the foundations for a solid forex strategy.

What is the RSI?

The relative strength index (RSI) is an oscillating price momentum indicator that moves between values of 0 and 100. The primary function of the RSI is to demonstrate overbought and oversold conditions. However, it can also point to a general trend, a trend reversal, or corrective pullbacks in price.

RSI values of 30 or below are typically considered to indicate that a currency pair is oversold and priced below its worth based on recent price movements, while values of 70 or above are considered to indicate that a currency pair is overbought and priced too high relative to its recent price action. Traders may use an RSI crossover strategy to trade reversals when the RSI is at extreme levels.

What is the MACD?

The moving average convergence divergence (MACD) oscillator is a momentum indicator, designed to show the relationship between two sets of moving averages. The MACD is calculated by subtracting the value of a long-period exponential moving average (EMA) from a short-period EMA. Both moving averages use closing prices of the period that is measured.

There are various ways to trade forex using the MACD. You can trade the MACD crossover of the zero line or signal line. You could also use MACD divergence to identify the direction of the current market trend. I think it is best to combine all of the MACD signals with other indicators such as the RSI to confirm each buy or sell trading signal.

How to trade the RSI and MACD strategy?

We will be combining all the elements of the MACD and RSI to establish the market trend and when there is an opportunity to time our entry into this trend. We will also keep an eye on any key support and resistance levels to see how price reacts around them whilst candlestick patterns can be a good way to confirm trades.

Buy signal

  • RSI (14) is around the oversold 30 zone
  • MACD (12, 26, 9) histogram is above signal line
  • RSI (14) divergence to the upside
  • Price bouncing from support or breaking resistance
  • Bullish price action

You can see in the EUR/USD 4-hour chart below that all of the conditions have been met for a buy trade based on the RSI and MACD strategy. The RSI has crossed over the oversold 30 level and the MACD has crossed above the signal line, both suggesting we are seeing an uptrend. We can see that price has tested and bounced away from a significant support level which is holding up well. The buy signal is confirmed with bullish price action including hammer candlestick patterns. A stop loss just below the support level at 20 pips would have been sufficient. This is relatively small when you consider price moved at least 850 pips in our direction. You will notice that there was RSI divergence in the way up confirming the ongoing trend whereas there are multiple MACD buy signals throughout. Have a look and see if you can spot them on the chart.

RSI MACD Strategy Buy Signal
RSI MACD Strategy Buy Signal

Sell signal

  • RSI (14) is around the overbought 70 zone
  • MACD (12, 26, 9) histogram is below signal line
  • RSI (14) divergence to the downside
  • Price bouncing from resistance or breaking support
  • Bearish price action

In the EUR/USD 4-hour chart below, all of the conditions have been met for a MACD and RSI sell trade. The RSI has just crossed below the overbought zone whilst the MACD is below the signal line and showing momentum to the downside. Price has tested and moved away from a strong resistance level. This all suggests we are seeing a downtrend forming. The doji bars show some market indecision but the sellers eventually win the race as evident by the big red engulfing candlestick pattern. We could have placed the stop loss just above the recent resistance level which is a respectable 30 pips. Not bad when you consider this downtrend carried on for around 780 pips. There was ample opportunity to take profits on the way down.

RSI MACD Strategy Sell Signal
RSI MACD Strategy Sell Signal

RSI MACD strategy Pros & Cons

Pros

  • Catch some big market trends early
  • Indictors complement each other well
  • Any currency pair and chart timeframe
  • Can time entry into the trend
  • MACD and RSI indicators are free to use

Cons

  • Takes some practice to get used to
  • Requires the trader to take the initiative
  • There will still be false signals
  • Need to time the entry and exit well

RSI vs MACD

The RSI mainly spots overbought and oversold currency pairs whereas the MACD can determine the trend direction and momentum. You can also get an idea of the trend by using RSI divergence but I think the extreme zones can be unreliable as price will often continue in the same direction for quite some time before turning round. The MACD on the other hand, can be used in many ways to time entry in line with the overall trend. I think they compliment each other well as one is more suitable for spotting trends and the other can be good at identifying pullbacks to enter a position inline with the overall trend.

Conclusion: is the RSI MACD forex strategy any good?

Yes, as you can see from the trade examples which I have shared here, the MACD and RSI strategy can catch some big market moves when implemented correctly. However, the indicators to require additional confirmation in terms of price action analysis.

You will also need good forex money management as with any manual or automated forex strategy. I would look to cut bad trades short and let my winners run. I would lock in any good trades at break even and trail the remainder of the position with a trailing stop loss to try and maximise the potential of each move.

If you think that the RSI and MACD strategy is something that you would like to try, you could always test it out on a demo account to see how things go. You can get a free forex demo account from most forex brokers, including IC Markets who have tight spreads and low fees for trading forex. I would always practice any forex strategy on demo at first in order to understand how it works and see if it produces good results before making any commitment.

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