MACD

A Wealth of Knowledge

One of the most famous indicators in the world of trading, we look at how one can use MACD in their trading...


MACD

Definition

Moving average convergence divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the "signal line", is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.


Moving Average Convergence Divergence (MACD) BREAKING DOWN 'Moving Average Convergence Divergence - MACD'

Interpretation

There are three common methods used to interpret the MACD:

1. CROSSOVERS. As shown in the chart above, when the MACD falls below the signal line, it is a bearish signal, which indicates that it may be time to sell. Conversely, when the MACD rises above the signal line, the indicator gives a bullish signal, which suggests that the price of the asset is likely to experience upward momentum. Many traders wait for a confirmed cross above the signal line before entering into a position to avoid getting getting "faked out" or entering into a position too early, as shown by the first arrow.

2. DIVERGENCE. When the security price diverges from the MACD. It signals the end of the current trend.

3. DRAMATIC RISE. When the MACD rises dramatically - that is, the shorter moving average pulls away from the longer-term moving average - it is a signal that the security is overbought and will soon return to normal levels.

Traders also watch for a move above or below the zero line because this signals the position of the short-term average relative to the long-term average. When the MACD is above zero, the short-term average is above the long-term average, which signals upward momentum. The opposite is true when the MACD is below zero. As you can see from the chart above, the zero line often acts as an area of support and resistance for the indicator.


  • Next Up OsMA
  • Moving Average Convergence ...
  • Trigger Line
  • Signal Line
  • OsMA
  • Percentage Price Oscillator - PPO
  • Confirmation
  • Ease Of Movement
  • Exponential Moving Average - EMA
  • Indicator
  • Simple Moving Average - SMA


Trigger Line

A moving-average line found in the moving average convergence divergence (MACD) theory, which is used to signal buy or sell points for a security. The trigger line interacts with the two moving averages that form the MACD line and attempts to predict upcoming trends.

BREAKING DOWN 'Trigger Line'

The trigger line provides traders with technical insight on when to long or short a stock. A common use of the trigger line is found in crossovers. When the trigger line crosses above the MACD line, a buy signal is sent, indicating that a trader should purchase the stock. Inversely, the trigger falling below the MACD represents a bearish trend, where the trader should short the stock.


Signal Line

A moving average plotted alongside a technical indicator and is used to create transaction signals. Buy signals are generally created when the indicator crosses above the signal line, while sell signals are generated when the indicator crosses below it.

A signal line is also commonly known as a "trigger line".

BREAKING DOWN 'Signal Line'

The MACD indicator and the stochastics oscillator are the two most popular tools used in technical analysis that generate transaction signals by using a signal line. Most trigger lines are created by using a three- to nine-period moving average of the indicator values.


blog comments powered by Disqus