RSI Explained: The Relative Strength Index
Short answer: RSI measures momentum on a scale of 0-100, showing whether an asset is overbought (above 70) or oversold (below 30).
What RSI actually measures: RSI compares the magnitude of recent gains to recent losses. It answers: “Over the last N periods, how strong have the up moves been vs. the down moves?”
The formula (simplified):
RSI = 100 - (100 / (1 + RS))
where RS = Average Gain / Average Loss over N periodsStandard setting: 14 periods
How to read RSI:
| RSI Level | What it suggests |
|---|---|
| Above 70 | Overbought — momentum stretched to upside |
| 50-70 | Bullish momentum |
| 50 | Neutral |
| 30-50 | Bearish momentum |
| Below 30 | Oversold — momentum stretched to downside |
Common mistakes with RSI:
1. “Overbought = sell immediately” Wrong. In strong uptrends, RSI can stay above 70 for weeks. Overbought means momentum is strong, not that price must drop.
2. “Oversold = buy immediately” Wrong. In downtrends, RSI can stay below 30 while price keeps falling. Oversold can get more oversold.
3. Using RSI in isolation RSI is context-dependent. RSI at 40 in an uptrend (healthy pullback) means something different than RSI at 40 in a downtrend (weak bounce failing).
How to actually use RSI:
In uptrends:
- RSI dips to 40-50 = potential buying opportunity
- RSI breaks below 40 = trend might be weakening
- RSI holds above 50 on pullbacks = trend is healthy
In downtrends:
- RSI rallies to 50-60 = potential short/exit opportunity
- RSI breaks above 60 = trend might be reversing
- RSI fails at 50 = downtrend still intact
RSI Divergence (the real edge):
| Type | What it looks like | What it means |
|---|---|---|
| Bullish divergence | Price makes lower low, RSI makes higher low | Downside momentum fading — potential reversal |
| Bearish divergence | Price makes higher high, RSI makes lower high | Upside momentum fading — potential reversal |
Divergence doesn’t mean “reverse now” — it means “momentum is weakening.” Combine with price action.
Mark’s RSI usage: We track RSI as one momentum input among several. RSI at 75 with rising trend strength = healthy bull. RSI at 75 with fading momentum elsewhere = caution warranted.
MACD Explained: Moving Average Convergence Divergence
Short answer: MACD shows the relationship between two moving averages, helping identify momentum shifts and trend changes.
The components:
| Line | What it is |
|---|---|
| MACD Line | 12-period EMA minus 26-period EMA |
| Signal Line | 9-period EMA of the MACD Line |
| Histogram | MACD Line minus Signal Line (visual of the gap) |
What MACD tells you:
- When fast momentum (12 EMA) is stronger than slow momentum (26 EMA)
- When that relationship is accelerating or decelerating
- Potential trend changes before they’re obvious on price
How to read MACD:
1. MACD Line position:
- Above zero = short-term momentum > long-term (bullish)
- Below zero = short-term momentum < long-term (bearish)
2. MACD crossovers:
- MACD crosses above Signal = bullish momentum increasing
- MACD crosses below Signal = bearish momentum increasing
3. Histogram:
- Growing bars = momentum accelerating in that direction
- Shrinking bars = momentum decelerating (potential shift coming)
Common MACD signals:
| Signal | What it looks like | Reliability |
|---|---|---|
| Bullish crossover | MACD crosses above Signal | Medium — can lag |
| Bearish crossover | MACD crosses below Signal | Medium — can lag |
| Zero line cross up | MACD goes from negative to positive | Strong — confirms trend shift |
| Zero line cross down | MACD goes from positive to negative | Strong — confirms trend shift |
| Bullish divergence | Price lower low, MACD higher low | Strong — momentum fading |
| Bearish divergence | Price higher high, MACD lower high | Strong — momentum fading |
MACD’s weakness: It’s a lagging indicator. By the time MACD confirms a trend, you’ve missed part of the move. That’s the tradeoff for reliability.
The histogram trick: Watch the histogram shrink before crossovers happen. A shrinking histogram means the crossover is coming — you can prepare before it confirms.
Mark’s MACD usage: We watch MACD zero-line crosses for trend confirmation and histogram divergence for early warning. Crossovers alone are too slow for entries — we combine with other signals.
Bollinger Bands Explained
Short answer: Bollinger Bands show a price range based on volatility — the bands expand when volatility increases and contract when it decreases.
The components:
| Band | What it is |
|---|---|
| Middle Band | 20-period Simple Moving Average (SMA) |
| Upper Band | Middle Band + (2 × standard deviation) |
| Lower Band | Middle Band - (2 × standard deviation) |
What Bollinger Bands tell you:
- Current price relative to recent range
- Whether volatility is expanding or contracting
- Potential overbought/oversold conditions (context-dependent)
Key concepts:
1. The Squeeze: When bands contract tightly, volatility is low. Low volatility periods often precede big moves. A squeeze doesn’t tell you direction — just that a move is likely coming.
2. Band walks: In strong trends, price can “walk” along the upper or lower band for extended periods. This isn’t a reversal signal — it’s a sign of strength.
3. Mean reversion: Price touching the upper band doesn’t mean “sell.” Price touching the lower band doesn’t mean “buy.” Bands show relative position, not absolute signals.
How to actually use Bollinger Bands:
| Context | What to look for |
|---|---|
| Range-bound market | Fade moves to outer bands |
| Trending market | Trade bounces off middle band in trend direction |
| Pre-breakout | Watch for squeeze (contracting bands) |
| Post-breakout | Expanding bands confirm the move is real |
Bollinger Band Width (the secret weapon): This measures how wide the bands are (Upper - Lower) / Middle.
- Lowest width in 6 months? Breakout likely coming.
- Suddenly expanding? Move is accelerating.
- Contracting after expansion? Move might be ending.
Common mistakes:
1. “Price hit upper band = overbought” Only in ranges. In uptrends, price hits the upper band constantly. That’s what uptrends do.
2. “Squeeze = buy the breakout” Squeezes don’t tell direction. You need other tools to determine which way it’ll break.
3. Ignoring the middle band In trends, the 20 SMA (middle band) acts as dynamic support/resistance. That’s often more useful than the outer bands.
Mark’s Bollinger Band usage: We track band width to identify volatility regimes. Contracting bands = something’s coming. Combined with trend direction, this helps position before the move.
Moving Averages: SMA vs EMA Explained
Short answer: Moving averages smooth price data to show trend direction. SMA weights all periods equally; EMA weights recent prices more heavily.
Simple Moving Average (SMA):
- Adds up closing prices over N periods, divides by N
- Equal weight to all prices
- Smoother, slower to react
- Better for identifying major trend direction
Exponential Moving Average (EMA):
- Applies more weight to recent prices
- Reacts faster to price changes
- More responsive, but noisier
- Better for timing entries/exits
Which to use:
| Use case | Better choice |
|---|---|
| Identifying major trends | SMA (50, 100, 200) |
| Shorter-term signals | EMA (9, 12, 21) |
| Dynamic support/resistance | Either works |
| Crossover systems | Often EMA for speed |
Key moving averages:
| MA | What traders watch for |
|---|---|
| 9/10 EMA | Short-term momentum |
| 20/21 EMA | Short-term trend |
| 50 SMA/EMA | Medium-term trend — institutional favorite |
| 100 SMA | Medium-long term trend |
| 200 SMA | Long-term trend — bull/bear dividing line |
Moving average signals:
1. Price vs. MA:
- Price above MA = bullish bias
- Price below MA = bearish bias
- The longer the MA, the more significant
2. MA crossovers:
- Shorter MA crosses above longer MA = bullish (Golden Cross: 50 crosses above 200)
- Shorter MA crosses below longer MA = bearish (Death Cross: 50 crosses below 200)
3. MA as support/resistance:
- In uptrends, MAs act as support (price bounces off)
- In downtrends, MAs act as resistance (price rejects)
The stacking concept: Bullish stacking: Price > 20 EMA > 50 SMA > 100 SMA > 200 SMA Bearish stacking: Price < 20 EMA < 50 SMA < 100 SMA < 200 SMA
When MAs are properly stacked, the trend is healthy. When they’re tangled, the market is choppy/directionless.
Common mistakes:
1. Too many MAs on the chart: You don’t need 10 moving averages. Pick 2-3 and learn them well.
2. Using crossovers in choppy markets: MAs work in trends. In ranges, they generate constant false signals.
3. Expecting precision: MAs are guides, not exact levels. “Support at the 50 SMA” means “zone around the 50 SMA.”
Mark’s MA usage: We focus on the 50 and 200 SMAs for major trend identification, and the 20 EMA for shorter-term momentum. The relationship between price and these MAs is a core input to our trend scoring.
Volume Analysis: What Trading Volume Tells You
Short answer: Volume shows conviction behind price moves. High volume confirms moves; low volume suggests they might fail.
The core principle: Price shows WHAT happened. Volume shows HOW MUCH conviction was behind it.
Volume confirms price:
| Price action | High volume | Low volume |
|---|---|---|
| Breakout up | Confirmed — buyers committed | Suspect — might fail |
| Breakout down | Confirmed — sellers committed | Suspect — might recover |
| Trend continuation | Healthy trend | Trend might be exhausting |
| Reversal | Strong reversal signal | Weak — might not hold |
Key volume concepts:
1. Volume spikes: Sudden volume 2-3x average often marks significant events:
- Climax tops (exhaustion of buyers)
- Capitulation bottoms (exhaustion of sellers)
- Breakout confirmation
2. Volume trend:
- Volume increasing with price = healthy trend
- Volume decreasing with price = trend might be ending
- Rising price on falling volume = bearish divergence
3. Relative volume: Compare current volume to average. “High volume” means nothing without context.
- Volume at 2x average = noteworthy
- Volume at 3x+ average = significant event
Volume patterns:
| Pattern | What it suggests |
|---|---|
| Breakout + high volume | Real breakout — trade it |
| Breakout + low volume | Fake breakout — be cautious |
| Pullback on low volume | Healthy pause — trend likely continues |
| Pullback on high volume | Distribution — trend might reverse |
| Rally on decreasing volume | Buyers exhausting — potential top |
| Drop on decreasing volume | Sellers exhausting — potential bottom |
Volume in crypto: Crypto volume data is messier than stocks:
- Wash trading inflates exchange volumes
- Multiple exchanges with different volumes
- 24/7 trading means no clear “average”
Useful approach: Focus on relative changes, not absolute numbers. Volume today vs. volume last week is more useful than “high” or “low” in isolation.
Mark’s volume usage: We track relative volume to confirm trend signals. A breakout with 2x volume is a real breakout. A breakout on light volume is suspicious. Volume is confirmation, not prediction.
Support and Resistance: Price Levels That Matter
Short answer: Support is a price level where buying tends to emerge. Resistance is where selling tends to emerge. These levels create structure you can trade around.
Why support and resistance work:
- Memory: Traders remember where they bought or sold before
- Orders cluster: Stop losses and take profits pile up at obvious levels
- Self-fulfilling: Everyone watches the same levels
Types of support/resistance:
| Type | How it forms |
|---|---|
| Horizontal | Previous highs, lows, consolidation zones |
| Trendlines | Diagonal lines connecting highs or lows |
| Moving averages | Dynamic S/R that moves with price |
| Round numbers | Psychological levels ($50K BTC, $1 tokens) |
| Fibonacci levels | 38.2%, 50%, 61.8% retracements |
| Volume profile | Levels where most trading occurred |
How support becomes resistance (and vice versa):
When support breaks, it often becomes resistance:
- You bought at $100 (support)
- It drops to $80
- It rallies back to $100
- You sell to “get back to even”
- Your selling creates resistance at former support
This flip is called polarity — one of the most reliable patterns in trading.
How to identify strong levels:
1. Multiple touches: A level tested 4 times is more significant than one tested once.
2. Timeframe: Weekly support matters more than 15-minute support.
3. Volume at level: High volume at a level means lots of traders are anchored there.
4. Confluence: Multiple techniques pointing to the same level = strong level.
How to trade support and resistance:
| Scenario | Action |
|---|---|
| Price approaching support in uptrend | Look for bounce — potential buy |
| Price approaching resistance in uptrend | Watch for breakout or rejection |
| Support breaks with volume | Trend might be changing — caution |
| Resistance breaks with volume | Potential new uptrend — look to buy pullbacks |
Common mistakes:
1. Drawing too many lines: If your chart looks like a spider web, you’re doing it wrong. Focus on the most obvious, most tested levels.
2. Treating levels as exact prices: Support/resistance are zones, not exact numbers. Give them room.
3. Fighting strong breaks: When a level breaks with conviction, don’t try to fade it. The level has failed.
4. Ignoring the trend: Support is more likely to hold in uptrends. Resistance is more likely to hold in downtrends. Context matters.
Mark’s S/R usage: We identify key levels and track how price behaves around them. A strong bounce off support in an uptrend confirms strength. A weak bounce that fails signals trouble. Levels provide context for trend signals.
Putting Indicators Together: A Framework
The mistake most beginners make: Adding indicator after indicator until the chart is unreadable, then getting paralyzed by conflicting signals.
The fix: Use indicators for specific jobs.
| Job | Tools |
|---|---|
| Trend direction | Moving averages, price structure |
| Momentum | RSI, MACD |
| Volatility | Bollinger Bands, ATR |
| Confirmation | Volume |
| Key levels | Support/resistance |
A simple multi-indicator framework:
1. Trend (what direction):
- Price vs. 50/200 SMA
- Higher highs and higher lows?
2. Momentum (how strong):
- RSI position and direction
- MACD histogram expanding or contracting
3. Volatility (what to expect):
- Bollinger Band width
- Recent range expansion or contraction
4. Confirmation:
- Volume supporting the move?
- Key levels holding or breaking?
Example analysis:
“BTC is above the 50 and 200 SMA (uptrend confirmed), RSI at 58 and rising (healthy momentum), Bollinger Bands starting to expand (volatility increasing), volume above average on up days (confirmed). Watching the $95K resistance level — if we break with volume, trend continuation likely.”
That’s what Mark does.
We synthesize multiple indicators into a clear trend assessment — not a prediction of where price will go, but a description of what’s happening right now.
- Trend direction: Bullish, bearish, or neutral
- Trend strength: Strong, moderate, or weak
- Momentum: Accelerating, stable, or fading
- Volatility: Expanding, stable, or contracting
You get the read. You make the decision.
Indicators describe the present — they don’t predict the future. Use them to understand what’s happening, not to pretend you know what’s coming.