MACD
Developed by Gerald Appel,
The Moving Average Convergence/Divergence is one of the simplest, reliable, and most commonly used indicators.
It is a momentum oscillator and 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 a second "Signal" line is then calculated from the resulting "Fast" line and 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 and a 26-period exponential moving average and a 9-period exponential moving applied to the fast line, this plots the "Signal" line.
- Fast line= difference between 12 and 26 exponential moving averages
- Signal line= moving average of this difference of 9-periods
Stock Technical Analysis and Generating Stocks Signals
The MACD is commonly used as a trend-following indicator and works most effectively when analyzing trending market movements. The three common methods of using MACD to generate signals are:
Stock Trading Crossovers Stocks Trading Signals:
Fast line/Signal line Crossover:
- A buy signal is generated when the Fast line crosses above the Signal line
- A sell signal is generated when the Fast line crosses below the Signal line.
However, in a strong trending market this stocks signal gives a lot of whipsaws, the best crossover to use would thus be the Zero Line Crossover Signal that is less prone to whipsaws.
Zero Line Crossover Signals:
- When the Fast line crosses above zero center line a buy signal is generated.
- when the Fast line crosses below zero center line a sell signal is generated.
Divergence Stocks:
Looking for divergences between the MACD and stocks price can prove to be very effective in identifying potential reversal and/or trend continuation points in stocks price movement. There two types of divergences:
- Classic Divergence Signals
- Hidden Divergence Signals
Overbought/Oversold Conditions:
MACD is also used to identify potential overbought/oversold conditions in stocks price action movements.
These levels are generated if the shorter MACD Lines separate dramatically from the median, this is an indication that stocks price action is over-extending & it will soon return to more realistic levels.
MACD and Moving Average Stock Trading Crossover Stocks Trading System
This stocks indicator can be combined with others to form a stock trading system. A good combination with the Moving Average crossover system. A trading signal is generated when both give a signal in the same direction.
Technical Analysis in Stock Trading
