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Macd

What is the MACD?

The moving average convergence divergence calculation is a lagging indicator, used to follow trends. It consists of two exponential moving averages and a histogram as shown in the image below:

The default values for the indicator are 12,26,9.

It is important to mention that many traders confuse the two lines in the indicator with simple moving averages.

The slower line of the moving average convergence divergence is calculated by placing a 12-period EMA on the price and then smoothing the result by another 26-period EMA. The second line is calculated by smoothing the first line by a 9-period EMA. Thus, the second line is faster and hence is the “signal” line.

The last component of the indicator is the histogram, which displays the difference between the two MAs of the indicator. Thus, the histogram gives a positive value when the fast line crosses above the slow line and negative when the fast crosses below the long.

MACD Indicator

What signals are provided by the MACD?

What Signals are Provided

Moving Average cross

The most important signal of the moving average convergence divergence is when the faster MA breaks the slower one. This gives us a signal that a trend might be emerging in the direction of the cross. Thus, traders often use this signal to enter new trades.

Divergence

MACD also gives divergence signals. For example, if you see the price increasing and the indicator recording lower tops or bottoms, then you have a bearish divergence. Conversely, you have a bullish divergence when the price drops and the moving average convergence divergence produces higher tops or bottoms.

Distance between MAs (overbought/oversold)

Since the indicator has no limit, many traders do not think of using the tool as an overbought/oversold indicator.

To identify when a stock has entered an overbought/oversold territory, look for a large distance between the fast and slow lines of the indicator. The easiest way to identify this divergence is by looking at the height of the histograms on the chart.

This divergence often leads to sharp rallies counter to the primary trend. These signals are visible on the chart as the cross made by the fast line will look like a teacup formation on the indicator.

Recommendations

I prefer combining my MACD indicator with the Relative Vigor Index or with the Awesome Oscillator. The reason is that the RVI and the AO do not diverge from the moving average convergence divergence much and they follow its move.

For this reason, the RVI and the AO are less likely to confuse you and at the same time, provide the necessary confirmation to enter, hold or exit a position.

The TEMA also falls in this category, but I believe the TEMA could get you out of the market too early and you could miss extra profits.

Regrettably, I find the MACD + TRIX indicator strategy too risky. Yet, it could be suitable for looser trading styles.

All things considered, the Money Flow index + MACD generates many fake signals, which we clearly want to avoid.

Conclusion

Moving Average Convergence Divergence (MACD) is a lagging indicator
The indicator is used to find new trends and to signal the end of a trend
The indicator consists of three components:
- Faster Moving Average (Signal Line)
- Slower Moving Average
- MACD Histogram
The moving average convergence divergence provides three basic signals:
- Moving Average Crossover
- Divergence
- Overbought/Oversold Signals
MACD works with the following indicators:
- Relative Vigor Index (RVI)
- Money Flow Index (MF)
- Triple Exponential Moving Average (TEMA)
- TRIX
- Awesome Oscillator (AO)
The indicators best suited for the moving average convergence divergence indicator are the RVI and AO.
External Link - create the moving average convergence divergence formula in excel. This one is for all you book worms that need to see exactly how the indicator works.

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What is the MACD?

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