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MACD Explained along with trade signals and examples

When to avoid MACD MACD Case Study MACD Trading Strategies
What is MACD?

MACD stands for Moving Average Convergence and Divergence. MACD is calculated by subtracting fast Exponential Moving Average and a Slow Exponential Moving Average. These average moves towards and away from each other and hence the name was given as Moving Average Convergence and Divergence. Mr. Gerald Appel invented MACD in the late 1970s. MACD is so popular because it is one of the most reliable and easy to use technical indicator. Even though it is a lagging indicator, it provides a signal before moving average crossover. MACD gives signal for trend continuation and reversal therefore used both by bulls and bears. Though MACD calculation may be difficult and time consuming but most of the common charting package and stock analysis site provides it.

MACD Formula & Settings
MACD Formula
Any two EMA (Exponential Moving Average) can be used to calculate MACD but most common are 26 and 12 EMA. Here in TopStockResearch 12 and 26 day Exponential Moving Average is used.

MACD Default Settings
MACD Settings Day Trading
MACD Settings Swing Trading

Major component of MACD
1. MACD line: It's a graphical representation between the difference of fast exponential moving average and slower Exponential moving average.
2. MACD Signal line is the 9 period EMA of the MACD line.
3. Zero Line. It is a constant line with default zero line. It also acts as signal line.
4. MACD Histogram- It is plot of difference between MACD line and signal line.


How to use MACD

There are three different indicators in MACD that provides a signal to technical analysts. They are:
1. MACD and signal line crossover. When MACD line moves above Signal line a Buy signal is generated. Aggressive traders may jump at this point. This is easy to spot and its occurrence is also quite common but decisions based alone on this indicator may lead to losses. After this signal should be verified by other indicators. If after this indicator if MACD crosses above zero line then its reliability is considered better.
2. MACD moving above zero line. When the MACD line crosses above zero line buy signal is generated. This is equivalent a of 12 day EMA crosses above 26 EMA. Reliability of this is better than MACD and signal line crossover.
3. MACD and price divergence. When price is making higher highs and higher lows and MACD is making lower highs and lower lows, a trend reversal is generated. This is one of the rarest signal spotted of all MACD signals. MACD price divergence is one of the most reliable signals.


MACD and TopStockResearch

1. Exponential Moving averages used by TopStockResearch are 12, 26.
2. Colors which represents MACD are: Blue is for MACD. Red is for signal line. Green for MACD Histogram. Grey for MACD zero line.


MACD Bullish & Bearish Divergence
1) MACD Bullish Divergence

A MACD Bullish Divergence occurs when the market movement and the MACD indicator diverge, indicating a potential upward reversal. Divergence of this kind is sometimes seen as an indication that a positive reversal may be approaching and that the current downturn may be losing steam.

MACD Bullish Divergence Strategy Screener And Example

MACD Bullish Divergence

The price creates lower lows during the downtrend, but the MACD forms higher lows.

Screeners
MACD Bullish Divergence Strategy Example

2) MACD Bearish Divergence

A MACD Bearish Divergence occurs when the price movement and the MACD indicator diverge, indicating a possible downward reversal. This kind of divergence is sometimes seen as indicating that the current uptrend is losing strength and that a negative reversal is approaching.

MACD Bearish Divergence Strategy Screener And Example

MACD Bearish Divergence

In an uptrend, the price makes higher highs, but the MACD histogram forms lower highs.

Screeners
MACD Bullish Divergence Strategy Example

Advantages & Disadvantages of MACD
Advantages of MACD
a. It is a solid indicator that helps to identify stock trends.
b. It provides a signal much before moving average crossover.

Disadvantages of MACD
a. It being a lagging indicator gives a signal after a trend has started.
b. In volatile market it gives too many wrong signals.
c. MACD price divergence by many is considered as unreliable as it depends on derivative of derivative therefore it is much far from its base.


Do's & Don't while using MACD
Do's
Don'ts
Other tutorials which further enhance better grasp on MACD can be found at:
When to avoid MACD MACD Case Study MACD Trading Strategies


Our website provides free Stock screening based on MACD. It can be found at below link:
Moving Average Convergence and Divergence (MACD)
MACD Bullish Crossover
MACD Bearish Crossover
MACD Cross Above Zero Line
MACD Video Tutorial

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StockAio.com (Stock All In One) is now Live
We hope you will provide us with the same Love & Support as you did for TSR.