MACD
Created by Gerald Appel,
The MA Convergence/Divergence is one of the simplest, reliable, and most often used technical indicators.
It's a momentum oscillator & also a trend following indicator.
Construction
The construction of this trading indicator calculates the difference between 2 moving averages and then plots that as 'Fast' line: the second 'Signal' line is then calculated from the resulting 'Fast' line & then drawn on the same window as 'Fast' line.
- 'Fast' line - Blue Line
- 'Signal' line - Red Line
The 'standard' MACD values for 'Fast' line is a 12-period exponential moving average & a 26-period exponential moving average & a 9-period exponential moving applied to the fast line, this plots 'Signal' line.
- Fast-line = difference between 12 and 26 exponential MAs
- Signal-line = moving average of this difference of 9-periods
Stock Technical Analysis & Generating Signals
The MACD is oftenly used as a trend following trading indicator and works most efficiently when interpreting the trending market movements. The 3 common techniques of using MACD indicator to generate trade signals are:
Stock Indices Cross-Overs Signals:
Fast-line/Signal Line Crossover:
- A buy signal gets generated when the Fast line crosses above Signal line
- A sell stock signal gets generated/derived when the Fast line crosses below the Signal line.
However, in a strong trending market this stock signal gives a lot of whipsaws, the best cross over to use would thus be the Zero Line Crossover Signal that is less prone to whipsaw fakeouts.
Zero Line Crossover Signals:
- When the FastLine crosses above zero center line a buy stock trade signal is generated.
- when the FastLine crosses below the zero center line a sell stock trading signal is generated.
Divergence Trading:
Looking for divergences between the MACD and price can prove to be very effective in spotting the potential reversal and/or trend continuation points in stock trading price movement. There two types of divergence-setups:
- Classic Divergence Setup Signals
- Hidden Divergence Signals
Overbought/Over-sold Conditions:
MACD indicator is also used to spot potential overbought-oversold conditions in stock price action movements.
These levels and regions are derived & generated if the shorter MACD indicator Lines separate significantly from the median, this is an indication that stock price action is over-extending & it will soon return to the more realistic levels.
MACD and Moving Average Indices Cross Over System
This stock indicator can be combined with others to form a trading system. A good combination with the Moving Average crossover trading method. A signal gets generated when both give a trading signal in same direction.
Technical Analysis in Indices Trade
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