Market volatility makes it difficult to spot big trends. But you could increase your odds of winning using the Moving Average Convergence Divergence (MACD).
This trend-following indicator can help you determine whether a trend is real or fake, leading to informed decisions for better trading outcomes.
The MACD comprises of three general components:
- The MACD line, which shows the relationship between two exponential moving averages (EMAs) of a security’s price (ie: stocks, options etc).
- A signal line, which is a 9-day EMA of the MACD line. In other words, it’s a moving average of the difference between two moving averages.
- A histogram, showing when the MACD is above or below the signal line.
To get the MACD, you subtract the 26-period EMA from the 12-period EMA.
The MACD has a positive value when the 12-period EMA (the red line shown in the price chart below) is above the 26-period EMA (the blue line in the chart).
And it has a negative value when the 12-period EMA is below the 26-period EMA.
More:
When the MACD line crosses from below to above the zero line on the histogram (as seen in the chart below) it’s considered bullish. But on the other hand…
It’s considered bearish when it crosses from above to below the zero line.
Additionally, when the Moving Average Convergence Divergence (MACD) line crosses from below to above the signal line, it’s considered bullish. However, when it crosses from above to below the signal line, it’s considered bearish.
And finally, to gain a profitable edge, you can also observe the histogram’s movements to get a good sense of what’s likely coming next in the markets.
For example, a rising histogram suggests increasing momentum.
Meanwhile, a declining histogram indicates decreasing momentum.
Fair warning:
One main problem with the MACD is that it often signals a reversal…
But no actual price reversal happens.
Hence, the necessity of validating MACD signals with other reliable indicators to avoid false signals and get a clear picture of bullish or bearish trends.
Wishing you a blessed day,