Comparative study of two technical analysis tools: Moving average convergence and divergence and relative strength index in banking sector in India

Technical analysis is used for predicting the future price movements of stock prices based on the trend followed by the past prices of the stock. In recent past it has been found that only the past prices of any stock is not enough to predict its rise or fall in its future stock price. This being the reason few technical tools were introduced to forecast or predict the future prices of the stock. Relative Strength Index (RSI) and Moving Average Convergence and Divergence (MACD) are two such tools used for predicting future stock prices and decide whether to buy, sell or hold back the shares by an investor. In general, for buy, hold and sell indications, it is said that MACD is better than RSI, but the important role of RSI cannot be ignored for the signal of overbought or oversold.

Therefore, the various signals given by these technical indicators to make buy, sell and hold decisions are compared with each other and put to tests like Anova and K-Neighbourhood test to see its nearest indicating factor compared with its original share price and decide which technical indicator to rely upon.

This paper compares both the indicators with the help of a certain tests that are quoted to make decisions while trading by measuring the performance of both Relative Strength Index (RSI) and Moving Average Convergence and Divergence (MACD) and their effectiveness.