What is the MACD Indicator
The MACD indicator is one of the most common technical analysis tools in the trading world.
Shows the convergence or divergence of moving average convergence divergence (MACD).
The Macd is one of the best known technical analysis tools, and many consider it a real trading system.
The construction of this indicator is quite simple.
The MACD is based on two moving averages that are among the most used indicators by financial analysts for their constructive and interpretative simplicity.
What makes the MACD such a valuable tool for technical analysis is that it includes two indicators in one.
It can, therefore, help to identify the trend and, at the same time, can measure the quality of the momentum.
What does the MACD Indicator tell you
The indicator uses two moving averages of variable length to identify the direction of the trend and its duration.
It then calculates the difference in values between the two moving averages (the MACD line) and an exponential moving average of the same moving averages (signal line).
Finally, it identifies the difference between the two lines as a histogram that oscillates above and below the zero lines.
The periods used to calculate the MACD indicator can be easily customized to suit any strategy, but most traders use the 12- and 26-period periods by default.
A positive value of the MACD indicator, which is created when the short-term moving average is above the longer-term moving average, is read as a bullish signal.
The 12-period EMA that exceeds the 26-period EMA suggests that the price is rising faster than it has in the past, so we are looking at a buying signal.
Conversely, a moving average in the medium term that moves below an exponential moving average in the longer term shows that the price of the asset is falling faster than in the past, suggesting that it might be a good time to sell.
Through the MACD, you can evaluate the momentum, along with the direction of the trend and its duration.
The MACD indicator can be used to identify the primary trend of an asset.
A positive MACD value can be used as a filter to inhibit short operation.
Conversely, a negative value of the MACD indicator suggests that the downward trend is getting stronger and that it may not be the right time for long trading.
It is also possible to use this indicator to identify the end of a trend (reversal of the market).
You can then speculate against the trend as soon as you have signs of a lack of momentum or possible exhaustion of the trend.
What is the MACD signal line
The traditional buying and selling signal will be in case of a crossover between the averages.
You will have a rising signal when the MACD line crosses the signal line upwards. Conversely, there will be a downward indication when the MACD line crosses the signal line downward.
The faster the intersection, the more reliable the signal will be.
Zero Line Crossover
It is less common than the intersection with the Signal line and will occur when the MACD line crosses the zero line upwards (long signal) or downwards (short signal).
- MACD signal line input into histogram:
- Below zero: pulse continuation signal down
- Above zero: signal for upward pulse continuation
- MACD signal line output in a histogram:
- Below zero, aggressive buying opportunity
- Above zero, aggressive sales opportunity
This trading system will produce many false signals.
One way to avoid many false signals is to consider bullish “crossings” only and only if the MACD is above the zero lines.
If, on the other hand, the indicator is below the “0 lines”, then the setup shorts can be considered.
Another method is to take daily signals to set up intraday strategies: this will reduce market exposure times and minimize the number of stop losses.
The indicator may also be useful in identifying divergences in markets.
Divergence in a technical indicator shows a misalignment between the direction of market prices and the value of the indicator.
- The bullish divergence is identified when two consecutive minima are formed, and the most recent has reached a lower level than the previous one. Meanwhile, the MACD histogram must reach two minima, the most recent of which is at a level higher than the previous minimum.
- The downward divergence occurs when two consecutive minima are formed, and the most recent is higher than the previous one. At the same time, the MACD histogram reaches two maxima, the most recent of which is lower than the previous one.
The divergence almost always occurs immediately after a sharp price movement.
This divergence will only give us the signal that the price could reverse, and it will then be necessary to wait for confirmation through a break in the trend line.
But there are some things that the MACD can’t do well.
You should never use the indicator to find overbought or oversold conditions.
Without a standardized formula, the MACD can assume any value, making it impossible to identify “excess thresholds accurately.”
Method of MACD Indicator calculation
Before analyzing how the MACD indicator works, it is essential to consider the relationship between short-term moving averages and long-term moving averages.
The indicator is calculated by taking the difference between the short-term moving average (12-day exponential moving average) and a longer-term moving average (12-day exponential moving average).
The indicator value will be zero whenever the two moving averages cross each other.
MACD line: exponential 12-period moving average minus exponential 26-period moving average.
Signal line: 9-period EMA of the MACD Line
MACD histogram: MACD line – signal line
The MACD line
The MACD Line is the result of stealing a longer-term EMA with a shorter EMA.
The most commonly used values are the exponential moving average at 26 periods and the exponential moving average at 12 periods (shorter-term).
The signal line is an exponential moving average (EMA) of the MACD line; the most common setting is the 9-period setting.
The MACD histogram
The difference between the MACD line and the signal line is continuously different. The MACD histogram takes this difference and reports it in a histogram. The difference between the two lines oscillates around a line with a value of 0.
The MACD technical indicator will work very well in trendy markets, while it will provide many false signals in a side market.
The signals generated by the MACD indicator are easily interpretable and can be inserted into any automatic trading system.
- Identifies the performance of the underlying market and its different impulse and correction phases.
- Identifies market momentum
- Offers input signals
- It is a reaction indicator
- Can be used in Scalping, Day Trading and Swing Trading.
The main difficulty of using the MACD indicator is the timeliness of signals.
Unfortunately, it is a “lagging” indicator and, therefore, will not identify with precise timing the reversal of the trend.
- Does not identify intervals
- It is advisable to combine analysis and signals of the
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