Indicators: MA, RSI, MACD, Bollinger
Moving average as a running total
A moving average takes a set number of past closing prices, adds them, and divides by that number. If the period is ten, it uses the last ten closes. When a new close prints, the oldest close drops out and the newest one joins, so the average moves. That is why it is called moving: the window of prices slides forward with each new bar.
The length of the window changes what the line can show. A ten-period average reacts quickly to each new close because each close is one tenth of the sum. A fifty-period average reacts slowly because each close is only one fiftieth. Neither is more correct. They are different sums over different stretches of the same price history.
On a platform the line is drawn at the value of that sum. It sits below price in an uptrend and above price in a downtrend, but it is not a forecast. It is the average of closes that have already happened. When price crosses the line, the crossing tells you the latest close is above or below that average, nothing more.
RSI as a ratio of up moves to down moves
The relative strength index compares the average size of recent up moves with the average size of recent down moves over a set period, often fourteen bars. It divides the up average by the down average, adds one, divides one hundred by that result, and subtracts from one hundred. The output is a number between zero and one hundred.
A reading above seventy is often called overbought and below thirty oversold. Those words describe the ratio, not a command. A market can stay above seventy for a long time while prices keep rising, because the up moves remain larger than the down moves. The indicator is not a switch that flips when a level is touched.
The RSI uses only closes from the period you set. It cannot see volume, news, or orders sitting in the market. If you change the period from fourteen to seven, the ratio is built from fewer bars and moves more. The number on screen is the result of one division, not a verdict on where price goes next.
MACD and Bollinger as differences and spreads
MACD subtracts one moving average from another, usually a twelve-period from a twenty-six-period. The result is a line that crosses zero when the two averages meet. A nine-period average of that line, called the signal line, is plotted on top. The gap between the two lines is drawn as a histogram. Every part of MACD is built from closes.
Bollinger bands take a moving average, often twenty periods, and add and subtract a multiple of the standard deviation of those same closes. Standard deviation measures how spread out the closes were. When prices are quiet, the bands narrow. When prices swing, the bands widen. The middle band is the moving average itself.
Because MACD uses two averages and Bollinger uses one average plus a spread measure, both share the same closing prices with any moving average on the chart. They can turn together without being separate evidence. The arithmetic tells you what each can react to: past closes in a window. None can react to a central bank statement before it is published.
One stretch of AUD/USD, four sums, 20 pips
| Step | Amount | Note |
|---|---|---|
| The stretch | AUD/USD falls from 0.6660 to 0.6640 | 20 pips of movement on the chart |
| Moving average | Turns down after the fall | it averages closes, so the newest close is only one input among many |
| RSI | Drops towards the lower part of its 0 to 100 scale | it counts the size of down moves against up moves over the chosen period |
| MACD | The fast line crosses below the slow line | it is the gap between two averages, so it moves when that gap changes sign |
| Bollinger bands | Price touches the lower band | the bands sit a set number of standard deviations from the middle average |
| Value of 20 pips on one standard lot | A$200 | one pip is 10 units of the quote currency on 100,000 units, so 20 pips is 200 units of the quote currency; at an AUD/USD rate near 0.6640 that is about A$301, and the exact figure depends on the rate your platform converts at |
The A$ figure moves with the AUD/USD rate at the moment of conversion. Your broker may round pip values, apply its own spread, and charge commission or a swap on positions held overnight, so the amount that reaches your account can differ from the figure above.
Doing it once, step by step
You will set up one chart and read each of the four indicators as a sum, then check whether two of them share an input. Do these steps once, in order, on a demo account or a chart you can change without risk.
- 01
Open a chart of AUD/USD
Choose a platform that shows the instrument AUD/USD and a time frame such as one hour. Find the indicator menu and note the default periods each platform offers. Do not place a trade. The goal is only to see the lines.
- 02
Add a moving average and note its period
Add one moving average, for example a twenty-period simple average. Look at the last twenty closes on the chart and confirm the line sits at their average. Change the period to fifty and watch the line become smoother. That change is the window length changing, not a new signal.
- 03
Add RSI and read the number
Add RSI with a fourteen-period setting. Find the current value on the scale from zero to one hundred. Ask whether the up moves or down moves in the last fourteen bars were larger on average. The number is the result of that comparison.
- 04
Add MACD and identify the two averages
Add MACD with the common twelve, twenty-six, nine settings. The faster line is the difference between the twelve and twenty-six period averages. The slower line is the nine-period average of that difference. Watch the histogram grow and shrink as the gap changes.
- 05
Add Bollinger bands and watch the width
Add Bollinger bands with a twenty-period average and two standard deviations. The middle line is the moving average you already added. The upper and lower lines move apart when recent closes were spread out and come together when they were not.
- 06
Check which indicators share an input
Look at the moving average, the MACD and the middle Bollinger band. All three are built from closing prices over a window. If they point the same way, note that they may share the same closes rather than giving separate evidence. Write down which periods each uses before you read them together.
The mistake most people make here
The common mistake is treating four indicators as four separate opinions, when all four are arithmetic on the same past prices. A moving average, MACD and Bollinger middle band can all be built from the same closes, so they often agree for the same reason rather than for four reasons. The fix is to ask what each one is made of before reading it. If two of them share an input, they are not independent evidence. A second habit worth dropping is expecting any of them to react to news at the instant it lands; they can only respond once prices have printed.Check yourself
AUD/USD moves 30 pips while you hold one standard lot. One pip on that lot is 10 units of the quote currency. What is the gross figure in units of the quote currency, and roughly what is it in A$ at a rate near 0.6640?
30 pips x 10 = 300 units of the quote currency. At an AUD/USD rate near 0.6640, 300 divided by 0.6640 is about A$452 before any spread, commission or swap.
Two indicators on your chart both turn down at the same moment. Does that mean two independent signals?
Not necessarily. If both are built from the same closing prices, they can turn together because they share an input. Check what each one is calculated from before counting them as separate evidence.
Questions that come up next
Why do a moving average and MACD often point the same way?
MACD is built by subtracting one moving average from another, so it already contains moving averages inside it. When both turn together, they are often reacting to the same closing prices rather than giving two separate views. Before treating them as two pieces of evidence, look at what each one is calculated from. If they share an input, they share the reason they moved.
What does the period setting actually change?
The period sets how many past closes go into the sum. A short period uses fewer closes, so each new close carries more weight and the line moves more. A long period uses more closes, so each one carries less weight and the line moves less. Changing the period does not change the past prices, only how many of them are counted.
Can an indicator tell me about news before it happens?
No. Every one of the four is arithmetic on prices that have already printed. A central bank statement, a jobs report or a surprise announcement is not an input to any of these sums. The line can only move after prices have moved in response. Expecting it to react at the instant news lands is a common misunderstanding.
Does a reading above seventy on the RSI mean I should sell?
No. The reading describes a ratio: recent up moves have been larger than recent down moves. A market can hold above seventy while prices keep rising, because the up moves stay larger. The number is not a signal or a command. It is one division over the closes in the period you set.
Why do Bollinger bands widen and narrow?
The bands are built by adding and subtracting a measure of how spread out recent prices were. When recent closes are far apart, the measure is larger and the bands widen. When recent closes are close together, the measure is smaller and the bands narrow. The width is a description of past spread, not a prediction of the next move.
If I set all four indicators to the same period, will they agree?
They may agree more often, because they are then built from the same stretch of closes. But agreement for that reason is not four independent confirmations. It is one set of prices read four ways. Ask what each indicator is made of before counting how many point the same direction.
The words used on this page
- moving average
- A sum of a set number of past closing prices, divided by that number. As each new close prints, the oldest drops out and the newest joins, so the average slides forward.
- RSI
- The relative strength index. It compares the average size of recent up moves with the average size of recent down moves over a set period, and returns a number between zero and one hundred.
- MACD
- One moving average subtracted from another, usually a twelve-period from a twenty-six-period. A nine-period average of that line, the signal line, is drawn on top, and the gap between them is the histogram.
- Bollinger bands
- A middle line with two bands placed above and below it. The bands are made by adding and subtracting a measure of how spread out recent prices were.
- period
- The number of past bars an indicator counts. A short period uses fewer closes and moves more; a long period uses more closes and moves less.
- pip
- A small unit of price movement in a currency pair. On one standard lot of AUD/USD, one pip is 10 units of the quote currency, before spread, commission or swap.
What to take away
- Each of the four indicators is arithmetic on closing prices that have already happened, so none can react to news before prices print.
- A moving average, MACD and the Bollinger middle band can share the same closes, so agreement between them is not independent evidence.
- The period you set changes how many past closes go into the sum, and therefore how quickly the line moves.
- Before reading any indicator, ask what it is made of; if two share an input, they share the reason they moved.