Moving Average Convergence Divergence (MACD) is one of the technical analysis tools and Gerald Appel creates this Indicator in the late 1970s. It is used to detect changes in the strength, direction, speed, and duration of a trend in the price of a stock.
The MACD “indicator” or “oscillator” is a collection of the three signals calculated from historical price data, often the closing price. These are the three signal lines: the MACD line, the signal line, and difference (or divergence). MACD term can be used to refer to the indicator as a whole or specifically as the MACD line.
The first line, called the MACD line, is equal to the difference between a “fast” (short-term) EMA and a “slow” EMA (long-term). The MACD line is plotted over time with the MACD line’s EMA called the signal line or average line and the difference (or divergence) between the MACD line and the signal line are displayed as a bar chart called a histogram Line.
The faster EMA reacts to recent changes more quickly than the slower EMA. The MACD line can indicate a change in the stock’s trend. The moving average and MACD are examples of trend-following or Lagging indicators. These indicators are great when prices are relatively moving long trends.
They don’t inform you about upcoming price changes, they just tell you what prices are doing (ie going up or down) so you can invest accordingly. Trend-following indicators cause you to buy and sell late and, in exchange for losing initial opportunities, they greatly reduce their risk by keeping you on the right side of the market most of the time.
The most popular formula for MACD is the difference between a security’s price of 26 and 12-day EMA.
Out of the two moving averages that make up the MACD, the 12-day EMA is the fastest, and the 26-day EMA is the slowest. Closing prices are used to create a moving average. Typically, the MACD is plotted with the 9-day EMA to act as a trigger line. A bullish crossover occurs when the MACD moves above its 9-day EMA, and a bearish crossover occurs when the MACD moves below its 9-day EMA.
The histogram is positive when the MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA.
MACD is a trend-following indicator and is designed to detect changes in the trend. Generally not recommended for use in fluctuating market conditions. The following three types of trading signals generated are:
- MACD line crosses the signal line.
- MACD line crossing zero.
- Difference between prices and MACD levels.
The normal trading rule is to cross the signal line. Buy it when MACD crosses the signal line, or sell when it crosses the bottom signal line. When the MACD line crosses zero on the histogram, it is said that the MACD line has crossed the signal line. Histograms can also help visualize when two lines meet. a cross of MACD. A line up to zero is interpreted as bullish or a line below zero as bearish.
A positive divergence is made when the price forms a new low price, liquidation moves down, but MACD does not form a new low (i.e stays above where fell to that previous low). It is fast, it suggests that the downtrend may be almost over. A negative divergence occurs when the price makes a new higher, but MACD does not rise as high as before, it is bearish.
Signal Line Crossing
Signal line crossovers are the main signals provided by MACD. The standard interpretation is to buy when MACD crosses through the line and Sell when going down through the signal line, or the signal line.
An upward move is called a Bullish Cross and a downward move is called a Bearish cross respectively.
Center line or Zero Crossing
The crossing of the MACD line from zero occurs when there is no gap between fast and slow EMA. Move from positive to negative is bearish and from negative to positive, faster. Zero crossing provide evidence of a change in the direction of a trend but less confirmation of its momentum than a signal line crossing
Centerline crossovers are the next most common MACD signal. A bull Center line crossover occurs when the MACD line crosses above the zero line become positive.
This occurs when the underlying security’s 12-day EMA is trading above the 26-day EMA. A bearish center-line crossover occurs when MACD moves below the zero line to turn negative. This happens when 12-day EMA is moving below the 26-day EMA.
Central line crossings can last for a few days or a few months. everything depends the strength of the trend. MACD will remain positive until a continuous uptrend. MACD will be negative if trend continues
MACD False Signals
Like any forecasting algorithm, MACD can generate false signals. a fake Positive, for example, would be a bullish cross followed by a sudden drop in price. A false negative would be a situation where there was no crossover, however, led to a sudden uptick in the stock. A prudent strategy would be to apply a filter to the signal line crossover make sure they hold.
An example of a price filter would be to buy if MACD line breaks above the signal line and then stays above it for three days. Like any filtering strategy, it minimizes the possibility of false signals but it increases the frequency of gain loss. Analysts use a variety of methods to filter out false signals and confirm true signals.
Divergence and Loss of Momentum
Generally, a divergence occurs when the price trend of a security does not match a trend indicator. MACD divergence is formed when the MACD diverges from the price action of the underlying security. a rapid divergence Forms, when security’s price makes a lower low and MACD, makes a higher low.
A lower in the security confirms the current downtrend, but a higher low on the MACD indicates a downtrend.
The MACD Indicator is particularly useful as it gains momentum and trend in an indicator. This combination of trend and momentum can be applied to Daily, weekly or monthly charts. The standard setting for MACD is The difference between the 12 and 26-period EMA. Looking for more chartists
Sensitivity can try shorter short-term moving averages and longer-term moving averages.
normal speed. MACD(5,35,5) is more sensitive than MACD(12,26,9) and Might be more appropriate for weekly charts.
MACD is not particularly good at identifying overbought and oversold levels although it is possible to recognize historically, Overbought or oversold, MACD has no upper or lower limits Link your movement. During a bullish move, MACD can spread too far beyond its historical extremes. Also, remember that the MACD line is calculated using the actual difference between two moving averages.
How do traders use moving average convergence/divergence (MACD)?
Traders use the moving average convergence/divergence (MACD) to enter or exit a trade.