Macd – moving average – convegence /divergence
MACD is a “momentum” indicator that follows the trend and demonstrates the relationship between two moving averages. The MACD is calculated by subtracting a 26 day exponential moving average (EMA) from a 12 day exponential moving average. Another 9 day exponential moving average, called the “signal line” is located above the MACD and is used as a reference offering signals to buy or sell. Those who wish to may review the lesson on moving averages.
EMA = Exponential Moving Average
MACD = 12 Day EMA – 26 Day EMA
Signal Line = reference line that offers signals = 9 Day EMA
The MACD is one of the most utilised indicators in trading.
How do we use a MACD?
In trading, a MACD can be used in three different ways, depending on how we interpret the market:
When the MACD falls below the signal line (9 Day EMA), this method interprets this as a bearish movement, which is a signal to sell. On the contrary, when the MACD rises above the signal line, the indicator is interpreted as a bullish movement, starting from the moment of crossover below zero.
Many traders await a confirmation crossover above the signal line before opening a position to avoid being penalized for entering too early.
By divergence we mean the moment in which the price diverges from the MACD. This signifies the end of the current trend.
c) Sudden Rise
When the MACD shows a strong bullish movement (the shorter moving average moves sharply away from the longer term moving average), this is a signal of “overbought” and the price will therefore return quickly to normal levels.
Traders will also watch with interest, the movement above and below the zero line, since this signals the position of the short-term average in relation to that of the long-term average. When the MACD is above the zero, the short-term average is greater than the long-term average. On the contrary, when the MACD is below the zero, the short-term average is less than the long-term average.
The zero line often acts, in fact, as a support and resistance zone for the indicator.