MACD Indicator Primed
The MACD indicator stands for Moving Average Convergence Divergence (MACD) and was created by Gerald Appel in the late 1970s.
MACD indicators can significantly reduce the investor’s risk by assuring that the trade occurs on the right side of the market. MACD Indicator finds these trends by comparing the relationship between the variations in two moving averages.
MACD indicator is comprised of two exponential moving averages (EMA), covering two different time periods, which help to measure momentum in the security. The MACD is simply the difference between these two moving averages, which in practice are generally a 12-period and 26-period EMA. MACD indicator is a very powerful tool of the currency traders and the author of this series is willing to share some really useful knowledge about it.
Traders use MACD to determine whether a particular stock is overbought or oversold. It is also used to indicate trend reversals. Traders that trade divergences wait for periods where the price action does not resemble the action and patterns in the MACD value line. This indicates that price is about to reverse and match the patterns at the MACD. Traders must beware and avoid using such illogical set of so called indicators as the markets do not take cues from such indicators.
Traders will thus look to trade the reversal of the trend and consider this signal particularly strong when the market is making a new high or low and the MACD is not.
Signal-line crossover: A bullish crossover occurs when MACD crosses above its signal line and a bearish crossover occurs when it crosses below the signal line. However, bullish crossovers can take place below the zero line, and bearish crossovers can take place above the zero line. Signals given divergence of great importance when working under conditions of price extremes.
Divergence occurs when the direction of the MACD is not moving in the same direction of the price of the stock you are analyzing. This can be seen as an indication that the upward or downward momentum in the market is failing. Sell, or be careful about buying, if the price makes a new short-term high but the MACD makes a lower high. This is called bearish divergence and is one of the most powerful implications offered by the MACD.
Generally the MACD is a better indicator of the strength of a trend than it is of its direction. For this reason some traders ignore the crossover and divergence methods mentioned above and look instead at the length of the histogram bars. Generally, territory above the center line is deemed bullish, while the area below is considered bearish. Centered oscillators are useful for identifying strength and weakness, but not overbought or oversold extremes.
To learn more about the MACD click on the image above or click HERE
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