Indicators: MA, RSI, MACD, Bollinger
What you learn in 3 minutesThe word indicator comes from the Latin indicare, to point out, and on a chart it points at one thing only: arithmetic done on prices that have already happened. Four names appear on almost every platform, and each is a different sum. A moving average adds closing prices and divides. The RSI compares the size of recent up moves with the size of recent down moves. MACD subtracts one moving average from another. Bollinger bands add and subtract a measure of how spread out recent prices were. Because each one is built from past prices, each can only react to what those prices already did. None of them can see 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.
The mistake 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.