MACD Explained along with trade signals and examples

Example/Case StudyWhen MACD should be avoided ? Video Tutorials On MACD

What is MACD?

MACD stands for Moving Average Convergence and Divergence. MACD is a 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 lagging indicator, it provides signal before moving average cross over. 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.

EMA used to calculate MACD

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.

Major component of MACD

1. MACD line. Its a graphical representation of difference of fast exponential moving average and slower Exponential moving average.
2. MACD Signal line is 9 period EMA of the MACD line.
3. Zero Line. It is 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 signal to technical analyst. 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 decision based alone on this indicator may lead to losses. This signal should be verified by other indicators. If after this indicator if MACD crosses above zero line then it's reliability is considered better.
2. MACD moving above zero line. When MACD line crosses above zero line buy signal is generated. This is equivalent of 12 day EMA crosses above 26 EMA. Reliability of this is better than MACD and signal line cross over.
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 signal. 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.

Advantages of MACD

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

Disadvantages of MACD

a. It being an lagging indicator it gives signal after trend has started.
b. In volatile market it gives too many wrong signal.
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.

Other tutorials which further enhance better grasp on MACD can be found at:

Example/Case StudyWhen MACD should be avoided ? Video Tutorials On MACD

Our website provides free Stock screening based on MACD. It can be found at below link: