Trend Following and Momentum (RSI, MACD)
Indicators are not crystal balls foretelling the future; they are merely speedometers that mathematically measure the velocity and exhaustion of price.
Trend following is a strategy that aims to ride the tailwind of the market's general flow rather than fighting against it. Algorithmic indicators are utilized to confirm the current direction of the price and measure its strength (momentum). However, these tools do not dictate the market; they merely optimize the decision-making process by summarizing what is happening.
Moving Averages filter out price noise to reveal the direction of the main trend. If the price is above the average, the trend is positive; if below, it is negative. The RSI (Relative Strength Index), a momentum indicator, compares the magnitude of recent gains to recent losses to determine whether the market is in "overbought" (inflated) or "oversold" (undervalued) conditions. The MACD analyzes the convergence and divergence of different moving averages to detect the birth of a new trend or the weakening of an existing one.
Successful trend following is achieved not by blindly trusting these indicators, but by using them as proper filters within the structural context of price action.
