What is MACD?
Also known as moving average divergence divergence. This is a useful indicator that shows the trend of the market and the increase or decrease of that trend.
The concepts of convergence and divergence are defined as follows:
- Convergence is two MA lines going towards each other.
- Divergence is that the two MA lines are moving apart.
Factors that make up the indicator
The indicator is made up of 3 components: MACD line, signal line and MACD chart, details:
- Signal line: Identify changes in price momentum and act as a trigger for buy and sell signals.
- MACD line: Measure the distance between the two moving averages.
- MACD chart: Indicates the difference between the MACD and the signal line.
How does the MACD indicator work?
How to calculate the lines
This index includes 3 exponential moving averages. When calculating the MACD, consider the MACD and signal lines. Since then there is a calculation as follows:
MACD: 12-day EMA - 26-day EMA.
- Signal line: 9-day EMA of MACD.
MACD histogram: MACD line - signal line.
It is displayed as a graphical graph showing the distance between the MACD line and the signal line.
As explained the concept of convergence and divergence above. Talking about the speed of the MA lines, the MA12 is faster and is responsible for most of the MACD's movements. The MA26 is slower and less responsive to price changes in basic security.
Explain how it works
The MACD line oscillates above and below the zero line, also known as the centerline:
- Diagonal lines above zero are considered bullish, while moving below zero is called a decrease. When MACD rises from below zero, it is considered to be an increase. When it decreases from above 0, it is considered to be decreased.
- When the line it crosses from below to the signal line, the indicator is considered bullish. The lower the zero line, the stronger the signal.
- When the MACD line crosses from above to below the signal line, the indicator is considered bearish. The more you stay on the zero line, the stronger the signal.
- Within the trading range, the indicator will appear, with the line running back and forth on the signal line. Analysts using MACD often avoid trading in this situation or closing positions to reduce volatility in the portfolio.
How to set the indicator
Default MACD setting (12,26,9)
MACD is usually set as a symbol MACD (a, b, c) . Alphabetical variables represent time periods.
Variables a and b refer to the time periods used to calculate the MACD line discussed in the previous sections. They are subtracted from each other (short EMA minus long EMA).
The parameters a, b, c are usually set to MACD (12,26,9). This will be the default setting in nearly all charting software platforms, as these are typically applied to daily charts.
Change the default settings
Setup (12,26,9) is very useful in that it is mostly used by people. But changing these settings to find ways of trending in other contexts or in other time periods could certainly make more sense.
Traders can use another setting. This changes the way the fast and slow EMA works.
The big difference between a fast and slow EMA will help this setup respond more quickly to price changes.
Pros and cons of using MACD
The MACD indicator is widely used because it is both simple and reliable. Its popularity comes from two different signals it brings: the strength of the trend and the turning point of the trend.
The MACD not only determines whether the trend is up or down but also the strength of buy and sell signals.
You can choose to use the moving average SMA strategy to set buy and sell signals. But the instrument may be delayed, which means that market conditions may change before the trade is made. This is why the MACD indicator is popular, as it represents providing updates on what is happening in the market.
The MACD indicator also has errors. Therefore it should be used in conjunction with other technical analysis tools.
One drawback is that MACD is a short-term indicator. It allows the longest measurement it takes to be the 26-day MA. If you are a long-term trader, then the MACD may not be suitable.
Also this indicator is a trend that follows. That is, the indicator gives its signal when a trend occurs, not before it starts. Therefore, if you are looking to recognize an upcoming trend, MACD is not the best indicator for you.
What is the MACD indicator suitable for?
This indicator is most useful for stocks, cryptocurrencies, and other forms of securities with liquidity and trends. It is less useful for infrequent or limited trading instruments.
Intersection with signal line
This is the most common MACD signal. As introduced, it is MACD's 9-day EMA. As a moving average of the indicator, it follows the MACD line and makes it easy to detect the turning lines of the MACD.
The bullish crossover occurs when the MACD bounces and crosses above the signal line. The bearish crossover occurs when the MACD line turns down and crosses below the signal line. Crossovers can last for a few days or a few weeks, depending on the power of the move.
Intersection with centerline
A bullish centerline crossover occurs when the MACD line moves above the zero line to turn positive. This happens when the 12-day EMA moves above the 26-day EMA. A bearish centerline crossover occurs when the MACD line moves below the zero line to turn negative. This happens when the 12-day EMA moves below the 26-day EMA.
Although the intersection of the centerline may indicate a change in the direction of the trend. But traders often put more into signal signal crossings, since there is no sign of a trend change in the intersection of the centerline.
Divergence helps investors to predict the bottom and the top of the price. The divergence between price and MACD histogram is a typical signal generated by the MACD indicator. The divergence itself is a sign that a market reversal is about to take place.
Divergence is where the market price continues to rise, while the indicator shows a downward trend. It means the reversal is about to approach. A bullish divergence indicates that prices are going up but are about to reverse.
However, the divergence between price and index does not guarantee that the market will reverse. It is similar to the fact that it cannot indicate a specific price level that may be reached in the near future.
The divergence only makes sense, signaling a change in the likely price trend and that possibility is getting higher and higher.
How to trade effectively with the MACD indicator
The two MAs have different "speed", slow and fast. When a new trend forms, the fast line will react first and will cut the slow line.
When crossroads occur, the fast line starts to diverge or move away from the slow line, indicating that a new trend has formed.
The chart above, can be seen when the fast line crossed below the slow line helped identify a new downtrend.
However, notice when this crossover occurs, the MACD chart has not appeared yet. That's because as soon as the intersection, the difference between fast and slow roads is 0 should not be.
When the downtrend begins, the fast line diverges from the slow line, the chart starts to get bigger. The bigger the chart, the stronger the trend.
The case of a rapid pull-back line signals that the downtrend will reverse. From there began to rise points and uptrend formed. Right after that, if you make a buy order, it will be profitable, kkk.
So you guys pocket yourself a tool, an indicator of technical analysis. Remember to apply the MACD with the indicators Blogtienao Introduced for successful trading. Good luck!