MACD indicator

MACD

MACD stands for Moving Averages Convergence divergence. It’s used to identify the Moving Averages with a new trend. MACD is also one of the most popular indicators used by trader.

By using MACD we can see 3 indicators altogether on the chart. First is the short period MA (fast), second is the long period MA (slow) and the last one is the order of the histogram or a line that describes the size of the distance between two MA's as shown in the chart.

MACD Crossover

Because both Moving Average line has a different speed, the fast MA will react more quickly to price changes compare to slow MA. When a new trend occurs, fast MA will intersect with slow MA at one point and the crossover between these lines indicated that a new trend began to occur.

The second signal occurs when MA on MACD penetrated through the MACD centerline.
The Weakness of MACD is in providing its signal. This signal is quite slow because many of MACD signal occur from the pervious average price.
The advantage of MACD is it’s rarely giving a false signal because of its smooth movement on the chart. Bare in mind that MACD signal does not indicate any overbought or oversold condition.

There are some basic MACD principles that you must know:

1. MACD will move to the highest peak until reach one critical point and vice versa.

2. There are 3 possible price movements of MACD:

• The price will move according to MACD
• Price moves opposite to MACD until one certain point and then follow the flow of MACD sign and we called this as Divergent Convergent
• Price will move sideway until the end of the MACD trend.

By using these principles we can maximize our profit with a very small loss.

Beside just using MACD indicator, Stochastic Slow 8,3,3 can be used to support the signal by determine the peak & valley of MACD/overbought-oversold area as shown below.

MACD usually determined by knowing the differences between 12-EMA and 26-EMA. When MACD has a positive value with a shortterm MA line above longterm MA line, this indicates that the price movement is towards to the top and vice versa for the negative MACD value. Most traders also concern about "0/neutral line", this method is quite similar to MA crossover discussed before where the cross over provide the buy signal while cross down give sell signal. Hope you may understand this terminology. If you still confuse you may refer back to our previous discussion about MA crossover here.

Example above shows the very basic fundamental of MACD. The cross method use here is similar to the cross method use in MA.

You must know that MACD is one of a lagging indicator; hence it should always follow market movements. As shown in the example above, we can see that MACD has a divergence characteristic. Divergence occur when MACD not following the movement of the market price.

-Best of luck-