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.
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.
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.
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.
The divergence between price and MACD indicates that, while the price is still making new lows, the momentum behind the downtrend is weakening.
Confirm the divergence signal using additional technical indicators or research tools like TopStockResearch, as well as take volume and overall market circumstances into account.
Confirm the divergence signal using additional technical indicators or research tools like TopStockResearch, as well as take volume and overall market circumstances into account.
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.
The divergence between price and MACD indicates that, while the price is still making new highs, the momentum behind the uptrend is weakening.
It's essential to confirm the divergence signal with other technical indicators or analysis tools and consider factors such as volume and overall market conditions.
Confirm the divergence signal using additional technical indicators or research tools like TopStockResearch, as well as take volume and overall market circumstances into account.