Table of Contents
What is MACD?
Moving Average Convergence and Divergence or MACD is one of the most appreciated technical indicators in the world. MACD is a momentum Oscillator but unlike most oscillators, it is not used to identify overbought or oversold conditions. It is a trend following indicator which shows the relationship between 2 Exponential moving averages.
It appears on the chart as two lines that oscillate without boundaries. These 2 lines are 1. “MACD line” and 2 ”Signal line”. MACD line is calculated by subtracting 26-day ema from 12-day ema. Whereas a Signal line is a nine-day ema of the MACD line. . The crossover of the two lines give trading signals similar to a two moving average system.
Calculation of MACD
MACD Formula
MACD=12-Period EMA − 26-Period Ema
MACD is calculated by subtracting the long-term EMA (generally a 26-day ) from the short-term EMA ( generally a 12-day). EMA is a type of moving average that puts more emphasis on the most recent data.
MACD Histogram
MACD histogram is a visual representation of the difference between MACD and its signal line. Like MACD, the MACD Histogram is also an oscillator. the MACD Histogram is also designed to identify convergence, divergence and crossovers. The histogram is positive when the MACD is above its signal line and negative when MACD is below its signal line. the Positive or negative value increase when the MACD Diverge further away from the signal line and decreases when it converges on its signal line.
How Does MACD work?
A MACD generates Signals on crossovers.
A MACD is bullish when:
- It crosses above Zero
- crosses from below to above the signal line
And Bearish When
- It Crosses below Zero
- When Crosses above to below the signal line
How to Trade with MACD ?
MACD Trading Strategies
- MACD Crossover Strategy
In this Strategy, The crossover between the MACD line and the Signal line triggers trading signals. Take up a Long position when the shorter-term or more reactive line – in this case, the MACD line – crosses above the slower line – the signal line. And take Up a Short position when the more reactive line or the MACD line Crosses below the Slower moving line or the Signal line.
2 MACD Histogram reversals
The histogram is the most important part of MACD. When the price is moving strongly in a direction, the histogram will increase in height, and when the histogram shrinks, it is a sign the market is moving slower. This means that as the bars on the histogram move further away from zero, the two ema lines are moving further apart. this is a signal that the ema’s are tightening again, which can be an early sign of potential crossover
This strategy provides traders with an edge as it can be executed even before the movement actually takes place.
3 Crossing Zero
This method should be used carefully because it is delayed in nature, choppy markets would often see the signals issued too late. However, as a tool for providing reversal signals of long sweeping moves, this can be very useful.
If the MACD crosses the zero line from below, it indicates a potential uptrend, while the MACD crossing from above is a signal that a new downtrend may be starting.
Summary
MACD is one of the most popular indicators amongst technical analysts. MACD has 3 components: two moving averages and a histogram. if the two ema’s come together, they are said to be ‘converging’ and if they move away from each other they are ‘diverging’. The difference between the lines is represented on the histogram
There is no best time to use MACD, as it’s completely down to personal preference and each individual’s trading plan.
