Technical Analysis Techniques to Help Make the Big Buy or Sell Decision

When deciding to buy or sell stocks, cryptocurrencies, or commodities, a prudent investor would look at a wide range of fundamental and technical analysis parameters. Strong asset fundamentals are particularly relevant for long-term investment decisions. However, some technical analysis techniques can also be of tremendous help to short-term and medium-term oriented traders when making the big buy or sell decision. In this article, we would like to present three such techniques that can help you with that decision – MACD, RSI, and Bollinger Bands.

Technical Analysis to Identify Buy and Sell Opportunities

Identifying an optimal moment to buy or sell an asset shouldn’t rely exclusively on technical analysis. However, some of the techniques in the technical trader’s toolbox can help with finding that optimal moment. These techniques are typically those that help identify and measure price momentum or an asset’s overbought/oversold status. As we cover these techniques below, do remember to supplement your technical analysis with the fundamental assessment of your target asset.

Moving Average Convergence Divergence (MACD)

Moving Average Convergence Divergence (MACD) is a highly popular price momentum measure. It is based on deriving and plotting two moving average based lines on the target asset’s price chart. The first line, called the MACD line, is derived by subtracting the asset’s 26-day exponential moving average (EMA) from its 12-day EMA.

The second line, called the signal line, is the 9-day EMA of the MACD values. When the MACD line crosses the signal line and moves above it, this could indicate a potential buy opportunity for the asset. Conversely, when the MACD line crosses below the signal line, this might represent a good time to sell.
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MACD can be a good measure of momentum and trend. Its key advantage is the ability to indicate the strength of the buy and sell signals. Experienced traders may also adjust the default measurement periods (26, 12, and 9 days) used for the MACD and signal lines’ calculation if they feel like fine-tuning their analysis.

However, MACD is not without its cons. The ability to adjust the default measurement periods, while giving you flexibility and fine-tuning options, might be one of the greatest cons of MACD. A trader who delves into such adjustments must know what they are doing. Otherwise, the MACD analysis might lead to gross underestimates or overestimates of the buy and sell signals.

MACD also needs a currently present trend to provide actionable signals. MACD is largely ineffective if there is no currently present trend in the target asset’s price. Consequently, it is most useful when a strong trend is present.

Relative Strength Index (RSI)

RSI is another technique that can help you identify buy and sell signals. RSI is a popular momentum measure that indicates if the target asset is overvalued or undervalued.

RSI’s calculation is based on average gains and losses for the target asset over the past 14-day measurement period. The calculation yields a value that falls in the range between 0 and 100. Typically, an RSI above 70 indicates an overbought asset. There is an expectation that the asset will experience an imminent correction as it is overvalued. Thus, you are better off selling the asset.

Conversely, an RSI below 30 signals an oversold/undervalued asset. The asset is then a good candidate for a buy decision.

RSI’s main disadvantage is that it could give false signals in the presence of strong trends. Markets with weaker trends, or even sideways markets, are better candidates for using RSI. This is the key distinction between MACD and RSI. While MACD is more useful for stronger trends, RSI can help you more with the buy or sell decision when trends are subdued.

Bollinger Bands

The ubiquitously used Bollinger Bands are another technical analysis tool to help you make buy and sell decisions. Bollinger Bands are a relatively simple measure – they are based on adding and subtracting 2 standard deviations from the target asset’s 20-day moving average.

When an asset’s price consistently hits the upper end of the Bollinger Band, it is an indication of an overbought asset. Time to sell! Conversely, when an asset’s price persistently dances around the lower end of the Bollinger Band, it is an indication of an oversold asset. This could be a suitable time for a buy decision.

Do note that when the price breaks out of the upper or lower end of the Bollinger Band, it is not necessarily a buy or sell signal. Despite a common misconception, breakouts beyond the band’s boundaries should not be interpreted in any decisive way.

Bollinger Bands are relatively simple to construct and interpret. That ensures their popularity. However, Bollinger Bands are less useful on their own. It is better to combine the technique with MACD, RSI, and other methods, both technical and fundamental, for a buy or sell decision.

In conclusion, we would like to stress that no buy or sell decision should be made on the basis of one or two technical indicators. Always use the widest possible set of methods to inform your final decision. However, in your overall decision framework, the three technical analysis methods above can help you significantly with identifying short-term and medium-term trading opportunities.