MACD
Moving Average Convergence/Divergence
Section titled “Moving Average Convergence/Divergence”Moving Average Convergence/Divergence is a trend-following dynamic indicator that shows the correlation between two price moving averages.
Indicator Description
Section titled “Indicator Description”The Moving Average Convergence/Divergence (MACD) is calculated by taking the difference between a 26-period and 12-period Exponential Moving Average (EMA). To identify buy/sell opportunities, a signal line (a 9-period moving average) is plotted on the MACD chart.
Using MACD
Section titled “Using MACD”The MACD is most effective in trading markets with wide swings. There are three popular ways to utilize MACD: crossovers, overbought/oversold conditions, and divergences.
Crossovers
Section titled “Crossovers”The basic trading rule is to sell when the MACD falls below its signal line and buy when the MACD rises above its signal line. Buying/selling when the MACD crosses above/below zero is also common.
Overbought/Oversold Conditions
Section titled “Overbought/Oversold Conditions”MACD can be used as an indicator for overbought/oversold conditions. When the shorter moving average diverges significantly from the longer moving average (MACD rises), it suggests that the security price may be overextending and likely to return to more realistic levels.
Divergences
Section titled “Divergences”Divergences between the MACD and security prices indicate a possible end to the current trend. A bullish divergence occurs when the MACD makes new highs while prices fail to reach new highs. A bearish divergence occurs when the MACD makes new lows while prices fail to reach new lows. These divergences are most significant when they occur at relatively overbought/oversold levels.
Conclusion
Section titled “Conclusion”The MACD is a valuable indicator for identifying trends and potential buy/sell signals. It can be used in various ways, including crossovers, overbought/oversold conditions, and divergences. By understanding how to interpret MACD, traders can make informed decisions in the market.