Detailed Guide to Common Technical Indicators: MACD, RSI, and Bollinger Bands

The role of technical indicators

Technical indicators are a trader's "dashboard," helping us extract signals from price data. This article introduces the three most commonly used indicators: MACD, RSI, and Bollinger Bands.

MACD (Moving Average Convergence Divergence)

MACD consists of the fast line (DIF), slow line (DEA), and histogram. When the fast line crosses above the slow line, it is a "golden cross" buy signal; when it crosses below, it is a "death cross" sell signal. Changes in the histogram can be used to gauge trend strength.

RSI (Relative Strength Index)

RSI ranges from 0 to 100, with 30 and 70 typically used as thresholds. An RSI above 70 indicates overbought conditions, suggesting a possible pullback; below 30 indicates oversold conditions, suggesting a possible rebound. However, note that in strong trends, RSI can remain in overbought/oversold territory for extended periods.

Bollinger Bands

Bollinger Bands consist of three lines: the middle band (20-period moving average), the upper band, and the lower band (middle band ±2 standard deviations). Price typically fluctuates between the upper and lower bands; touching the upper band may signal a pullback, while touching the lower band may signal a rebound. A narrowing bandwidth often indicates an impending major move.

Three-indicator combination strategy

Using a single indicator can easily generate false signals, so a combined approach is recommended: when MACD shows a golden cross + RSI is in the 30-50 range + price rebounds from the lower Bollinger Band, it is a strong buy signal. Conversely, MACD death cross + RSI overbought + price touching the upper Bollinger Band is a sell signal.