The moving average convergence divergence (MACD) indicator and the relative strength index (RSI) are two indicators used by analysts and day traders. The primary difference between lies in what each is designed to measure.
The MACD is primarily used to gauge the strength of stock price movement. It does this by measuring the divergence of two exponential moving averages (EMAs), commonly a 12-period EMA and a 26-period EMA. A MACD line is created by subtracting the 26-period EMA from the 12-period EMA, and a line showing a nine-period EMA of that calculation is plotted over the MACD's basic representation as a histogram. A zero line provides positive or negative values for the MACD. Essentially, greater separation between the 12-period EMA, and the 26-period EMA shows increased market momentum, up or down.
The RSI aims to indicate whether a market is considered to be overbought or oversold in relation to recent price levels. The RSI calculates average price gains and losses over a given period of time; the default time period is 14 periods. RSI values are plotted on a scale from 0 to 100. Values over 70 are considered indicative of a market being overbought in relation to recent price levels, and values under 30 are indicative of a market that is oversold. On a more general level, readings above 50 are interpreted as bullish, and readings below 50 are interpreted as bearish.
Because two indicators measure different factors, they sometimes give contrary indications. For example, the RSI may show a reading above 70 for a sustained period of time, indicating a market is overextended to the buy side in relation to recent prices, while the MACD indicates the market is still increasing in buying momentum. Either indicator may signal an upcoming trend change by showing divergence from price (price continues higher while the indicator turns lower, or vice versa).
While both are considered momentum indicators, the MACD measures the relationship between two EMAs, while the RSI measures price change in relation to recent price highs and lows. These two indicators are often used together to provide analysts a more complete technical picture of a market.