Moving Average Convergence/Divergence Stock Indices Analysis & MACD Stock Indices Signals

Created by Gerald Appel,

The Moving Average Convergence/Divergence is one of the simplest, reliable, & most commonly used indicators.

It is a momentum oscillator & also a trend-following indicator.

Construction

The construction of this indicator calculates the difference between two moving averages and then plots that as the "Fast" line: the second "Signal" line is then calculated from the resulting "Fast" line & then drawn on the same panel window as the "Fast" line.

• "Fast" line - Blue Line
• "Signal" line - Red Line

The "standard" MACD values for the "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.

• FastLine = difference between 12 and 26 exponential moving averages
• Signal-line = moving average of this difference of 9-periods

Indices Analysis & How to Generate Trade Signals

The MACD is oftenly used as a trend-following indicator and works most effectively when interpreting trending market movements. The 3 common techniques of using MACD to generate signals are:

Indices Trading Cross-overs Trade Signals:

FastLine/Signal-line Crossover:

• A buy signal is generated when Fast Line crosses above Signal Line
• A sell signal is generated when FastLine crosses below the Signal Line.

However, in a strong trending market this signal gives a lot of whipsaws, the best cross-over to use would thus be the Zero Line Crossover Signal that's less prone to whipsaws.

Zero Line Crossover Trading Signals:

• When the FastLine crosses above zero center line a buy stock trade signal is generated.
• when the FastLine crosses below zero center line a sell stock trade signal is generated.

Divergence Stock Indices:

Looking for divergences between the MACD & price can prove to be very effective in spotting the potential reversal &/or trend continuation points in stock price movement. There 2 types of divergences:

1. Classic Divergence Signals
2. Hidden Divergence Trading Signals

Overbought/Oversold Conditions:

MACD indicator is also used to spot potential overbought-oversold conditions in stock price action movements.

These levels are generated if the shorter MACD Lines separate dramatically from the median, this is an indication that stock price action is over-extending & it will soon return to more realistic levels.

MACD and Moving Average Stock Indices Trading Cross-over Trading System

This technical indicator can be combined with others to form a trading system. A good combination with the Moving Average crossover system. A signal is generated when both give a signal in the same direction.

Technical Analysis in Stock Indices Trading