Home / Course / Module 5 / RSI, MACD and Momentum
Module 5 · Lesson 6 of 8Momentum indicators measure how fast and how strongly price is moving. RSI and MACD are two of the most used. This lesson shows the arithmetic and the honest limits.
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Momentum is the speed and strength of a price move. A car doing 70 mph and slowing is still going forward, but the slowing is information. Momentum indicators try to show when a move is accelerating or running out of energy, even while price is still going the same way.
These tools are called oscillators when they swing around a range. They are built entirely from past prices, so they are derived from the chart, not independent of it. They add a different view of the same data, not new information about the future.
An indicator can suggest that a move is stretched or slowing. It cannot tell you that a move will reverse. Strong trends can keep going while indicators look extreme.
The Relative Strength Index (RSI) compares recent average gains to recent average losses and expresses the result on a scale from 0 to 100. The standard setting uses 14 periods. The formula is:
RSI = 100 minus 100 / (1 + RS), where RS = average gain / average loss over the period.
Hypothetical: over 14 candles the average gain on up candles is $6 and the average loss on down candles is $3. RS = 6 / 3 = 2. RSI = 100 minus 100 / (1 + 2) = 100 minus 33.3 = 66.7. Buyers have been stronger than sellers recently, but it is not extreme.
Now suppose the average gain is $2 and the average loss is $6. RS = 0.333. RSI = 100 minus 100 / 1.333 = 100 minus 75 = 25. Sellers have clearly dominated.
| RSI reading | Common label | Careful interpretation |
|---|---|---|
| Above 70 | Overbought | Rise has been strong and fast; may be stretched |
| 30 to 70 | Neutral zone | No extreme reading |
| Below 30 | Oversold | Fall has been strong and fast; may be stretched |
| Around 50 | Balance | Buying and selling roughly equal; many use it as a trend dividing line |
The labels "overbought" and "oversold" are widely misunderstood. They do not mean "sell now" or "buy now". In a powerful uptrend RSI can stay above 70 for a long time, and in a strong downtrend it can stay below 30.
MACD stands for Moving Average Convergence Divergence. It builds on the EMAs from the previous lesson. It has three parts, using the standard 12, 26, 9 settings:
Hypothetical: the 12 EMA is $2,015 and the 26 EMA is $2,005. MACD line = 2,015 minus 2,005 = 10. Suppose the signal line is 8. Histogram = 10 minus 8 = 2, a positive bar. A positive MACD line means the faster average is above the slower one (recent prices higher). If next time MACD is 9 and the signal 9.5, the histogram turns slightly negative, which hints that upward momentum is fading even though price may still be higher.
| Event | What it shows |
|---|---|
| MACD crosses above signal line | Momentum turning up |
| MACD crosses below signal line | Momentum turning down |
| MACD crosses above zero | 12 EMA moved above 26 EMA |
| Histogram shrinking | Momentum losing speed |
Divergence happens when price and an indicator disagree. In bearish divergence, price makes a higher high but RSI (or MACD) makes a lower high. This suggests the push up is weaker than the previous one. In bullish divergence, price makes a lower low while the indicator makes a higher low.
Hypothetical: gold rallies to $2,060 with RSI peaking at 74. Later it climbs to $2,075, a higher high, but RSI peaks at only 66. Price went further while momentum was weaker. Some traders treat this as a warning that the rally is tiring. It is only a warning: price can continue upward for a long time with divergence showing, and divergence often appears many times before any turn.
Many traders combine a trend tool (such as a moving average) with a momentum tool (such as RSI) and with levels, then decide risk before entry. That is a process, not a prediction.
Indicators organise information and help you see when a move is stretched or slowing. They do not predict the future, and leveraged products can lose money quickly, so always plan the exit before the entry.
Not automatically. RSI above 70 means the rise has been strong, but strong trends can stay that way for a long time. Use it as one piece of context, alongside trend and levels.
There is no universally best setting. 14 periods is standard, and shorter settings are more sensitive but give more false signals. Test and stay consistent.
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