MACD Indicator

Indicator-

Indicators are used to indicate something happening in the market. The most commonly used indicator is the MACD  indicator. 

MACD Indicator-

Moving average convergence and divergence indicator

 Moving Average – the moving average for any given number of time periods is the sum of the stock’s closing prices that is number of time periods divided by that same number

For e.g. a 15 day moving average is the sum of closing prices of past 15 days divided by 15.

There are 2 line one is signal line (indicated by blue color) MACD line (indicated by red color) and a MACD histogram.

MACD line – this line reacts faster on the indicator compare to signal line

Signal line –this line reacts slower when compared to macd line

BULLISH moment

It occurs when the MACD line is above the zero line in this the fast line is above slow line which is positive.

BEARISH moment

It occurs when the MACD line is below the zero line in this the fast line is below slow line which is negative.

 

When two moving average move away from each other the MACD line rises or falls

Convergence

If the gap between 2 lines are less (if two lines are moving close)

Divergence

If the gap between 2 lines are more (if the two lines are moving away)

MACD histogram MACD histogram is used to search for divergence and also MACD signal line

The difference between MACD and signal line. Calculated by subtracting the 26 periods of EMA and 12 periods of EMA. The bigger the gap between the lines the higher gap is displayed by the MACD histogram.

Any length can be used

12,26,9 is most frequently used

When the signal line and the

It’s important to note the interaction between the two MACD line as well as their position relative to the zero line

Uses

1.Cossover

2.Over brought/over sold

3.Divergence

 

 

1. Crossover

Sell signal is generated when MACD line crosses above the signal line.

Buy signal is generated when the MACD line crosses below the signal line

Bullish signal are more significant when the crossover takes place below the zero line which indicates buy

Bearish signals are more significant when the crossover over takes place above the signal line which indicates sell

These signals works best in trending markets that’s why it’s called trend is your friend

Use any indicator as a buffer to reduce the risk and not to depend on it as main signal

2. Over sold/over brought

Over brought-

When price has reached a significant upward move. Expect the price to fall and return to normal level

 

Over sold-

When price has experienced a significant downward move oversold condition expect the price to increase and reach the normal level

3. Divergence-

 Occurs when the MACD trend is in one direction while the price goes the other direction MACD is diversified tends to REVERSAL

Lower low in the price affirms the current downtrend. But the higher low in MACD shows down side momentum MACD bullish

The stronger signal appear when there is double divergence on both the histogram and signal of MACD line

Note: While using MACD line track the behavior of MACD line on daily chart and confirm the trade with the weekly time frame

MACD Bullish divergence occurs when the price records lower low and MACD forms higher low. Lower low in the price affirms the current downtrend. But the higher low in the MACD shows less downside momentum greater importance should be placed if the price makes new relative low while the pattern develops. MACD histogram divergence –the stronger signal appear when there is double divergence.Daily signal are more significant for MACD.