RSI and MACD are the two technical indicators most widely used by retail investors globally and in Egypt. Both were designed by practitioners in the 1970s and 1980s, both measure momentum, and both have stood the test of time because they capture something real about how price and volume evolve. Understanding them well — including their limitations — is a significant jump forward in practical trading skill for Egyptian market participants.
RSI (Relative Strength Index) was developed by J. Welles Wilder in 1978. In simplified terms, the indicator measures the speed and magnitude of recent price changes on a 0 to 100 scale. The standard lookback period is 14 bars (14 days on a daily chart). Mathematically, RSI compares the average size of up-days to the average size of down-days over that window. When up-days dominate, RSI rises toward 100. When down-days dominate, RSI falls toward 0. Values above 70 are traditionally called overbought, below 30 oversold.
In strongly trending Egyptian stocks, the 70 and 30 boundaries can be misleading. A stock in a powerful uptrend — say, Commercial International Bank during a bullish cycle — can stay above 70 for weeks without any meaningful pullback. Selling just because RSI hit 70 would leave you watching the stock continue higher. The better use of RSI in trends is to watch for divergence: when price makes a new high but RSI makes a lower high than its previous peak, momentum is fading even though price is still rising. This is a warning that the trend is tiring.
MACD (Moving Average Convergence Divergence) was developed by Gerald Appel around 1979. The main MACD line is the difference between a 12-period exponential moving average and a 26-period EMA of price. When the 12 EMA is above the 26 EMA, short-term momentum exceeds medium-term momentum — MACD is positive. When it is below, MACD is negative. The signal line is a 9-period EMA of the MACD line itself, plotted alongside. The histogram visualizes the distance between MACD and signal.
The most common MACD signal is the crossover. When MACD crosses above its signal line, it generates a bullish cue. When MACD crosses below, it generates a bearish cue. Crossovers above zero are stronger bullish signals than crossovers below zero, because the underlying trend is already positive. Like RSI, MACD shows divergence — when price makes a new high but MACD makes a lower high, the momentum driving the rally is weakening.
Both indicators have important limitations in the low-volume segments of the Egyptian market. For a small-cap stock that trades only a few hundred thousand pounds per day, the price can be moved by a single large order, producing RSI and MACD readings that reflect one trader's activity rather than broad market sentiment. Always check the volume before trusting a signal. An RSI oversold reading on 100x normal volume is a very different event from the same reading on 0.1x normal volume.
Combining indicators with volume is where skilled traders earn their edge. A classic high-conviction setup: stock pulls back to a well-tested support level, RSI drops into oversold territory (below 30), MACD histogram starts narrowing (momentum declining decelerating), and the day the price begins to turn higher, volume expands above the 20-day average. Each of those four elements alone is a weak signal. Together they are a meaningfully better-than-random setup.
A practical example on a hypothetical EGX blue chip: after a three-month uptrend, the stock rolls over and declines for three weeks. RSI falls to 28. MACD crosses below the signal line but the histogram is starting to flatten. Price touches the 200-day moving average which has acted as support twice in the past year. You wait for a green candle on above-average volume — it arrives on Tuesday. You enter on Wednesday open with a stop just below the 200-day MA. Your target is the prior swing high. This is a textbook confluence trade and the probability is still only 55 to 60 percent, not 100 percent. Technical analysis is probability management, not certainty. This article is for educational purposes only and does not constitute investment advice.
This content is for educational purposes only and does not constitute financial advice. Always do your own research before making investment decisions.