Technical Analysis
RSI, MACD, and Bollinger Bands Explained in Plain English
Technical indicators don't have to be confusing. Here's what RSI, MACD, and Bollinger Bands actually mean — explained like you're a human, not a textbook.
By Truevest Team · March 9, 2026 · 10 min read
Stop Staring at Squiggly Lines and Start Understanding Them
You open a stock chart. There are lines everywhere. Some are wavy, some are straight, some form bands. You have no idea what any of them mean. So you close the chart and go back to Reddit for stock tips.
Sound familiar? Let's fix that. Here are the three most important technical indicators, explained in plain English.
RSI (Relative Strength Index)
What It Is
RSI measures how fast and how much a stock's price has been moving. It gives you a number between 0 and 100.
How to Read It
- Above 70: The stock is "overbought." It's been going up a lot and might be due for a pullback. Think of it like a rubber band that's been stretched too far.
- Below 30: The stock is "oversold." It's been beaten down and might be due for a bounce.
- Between 30-70: Neutral territory. The stock is trading normally.
How to Use It
RSI is a confirmation tool, not a standalone signal. If you're thinking about buying a stock and the RSI is at 25, that's a good sign — the stock might be oversold and ready to bounce. If the RSI is at 85, you might want to wait for a pullback.
Important: In strong trends, RSI can stay overbought or oversold for extended periods. A stock can have an RSI of 80 and keep going up for weeks. Don't use RSI alone as a buy/sell signal.
Quick Reference
| RSI Value | What It Means | Action |
|---|---|---|
| 0-30 | Oversold — potentially undervalued | Look for buying opportunities |
| 30-50 | Bearish momentum slowing | Watch for reversal signals |
| 50-70 | Healthy bullish momentum | Trend is your friend |
| 70-100 | Overbought — potentially overextended | Consider taking profits or waiting |
MACD (Moving Average Convergence Divergence)
What It Is
MACD tracks the relationship between two moving averages of a stock's price. It shows you whether the stock's momentum is getting stronger or weaker — and when the trend might be about to change.
The Three Components
- MACD Line: The difference between the 12-day and 26-day moving averages. When the fast average is above the slow average, this line is positive (bullish).
- Signal Line: A 9-day moving average of the MACD line. This is your trigger line.
- Histogram: The bars that show the distance between the MACD line and the signal line. Bigger bars = stronger momentum.
How to Read It
- Bullish crossover: When the MACD line crosses ABOVE the signal line. This suggests upward momentum is building. Potential buy signal.
- Bearish crossover: When the MACD line crosses BELOW the signal line. Momentum is shifting downward. Potential sell signal.
- Histogram growing: Momentum is accelerating in the current direction.
- Histogram shrinking: Momentum is weakening. A trend change might be coming.
The Power Move: Divergence
One of the most powerful signals in technical analysis is MACD divergence:
- Bullish divergence: Stock price makes a lower low, but MACD makes a higher low. This suggests selling pressure is weakening even though the price is still dropping. Often signals a reversal.
- Bearish divergence: Stock price makes a higher high, but MACD makes a lower high. Buying pressure is weakening. Often signals a top.
Bollinger Bands
What They Are
Bollinger Bands are three lines plotted on a stock chart: a middle line (the 20-day moving average) and two outer bands that are 2 standard deviations above and below. They create a channel that contains roughly 95% of the stock's price action.
How to Read Them
- Price near the upper band: The stock is trading at the high end of its recent range. It may be overbought.
- Price near the lower band: The stock is at the low end. It may be oversold.
- Bands tightening (squeeze): Volatility is contracting. A big move is coming — you just don't know which direction yet.
- Bands widening: Volatility is expanding. A move is underway.
The Bollinger Squeeze
This is the most actionable Bollinger Band signal. When the bands get really tight (squeezing together), it means the stock has been trading in a narrow range and volatility is at a minimum. Think of it like a coiled spring — the tighter it compresses, the more explosive the release.
When you see a squeeze, watch for the breakout direction. Combine it with volume and other indicators to confirm which way it'll go.
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Start Your Free Trial →Putting It All Together
The real power of these indicators comes from using them together. Here's a high-probability setup:
- RSI is below 30 (oversold)
- MACD shows a bullish crossover (momentum shifting up)
- Price is touching the lower Bollinger Band (at the bottom of its range)
- Volume is increasing on the bounce
When three or four indicators align like this, you have a much higher probability trade than relying on any single signal.
Tools like Truevest AI run all of these indicators simultaneously and tell you when they're aligned — saving you from having to manually check each one across dozens of stocks.
Common Mistakes
- Using indicators in isolation: RSI at 30 doesn't mean "buy." It means "investigate further."
- Ignoring the trend: Indicators work differently in uptrends vs. downtrends. RSI can stay overbought for weeks in a strong uptrend.
- Overcomplicating your chart: If you have 15 indicators on your chart, you can't see anything. Three to five is plenty.