Analysts’ have spoken about various techniques to trade effectively in the stock market. This article adds a feathers to the list of such techniques and discusses about another stock market indicator helping the investor with better trading etiquettes. MACD indicators (moving average convergence/divergence) are a technical analysis indicator. Its main objective is to spot changes in the strength, direction, momentum and duration of a trend in stock’s price.
The MACD indicators or oscillators can be further categorized into a collection of three signals. These signals are calculated from historical price data, albeit the closing price. So what are these three signals?
- The MACD fast line,
- The signal line (or average line), &
- The difference (or divergence) or MACD histogram
The MACD indicator is a performance based equipment used to produce buy or sell signals in the stock market. Stock options’ trading is quite inconsistent and in order to sustain this volatility investors’ need a technical indicator offering them solutions to trade efficiently and significantly.
MACD can be explained by three common methods:
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- Crossovers: If an MACD indicator falls below the signal line, it represents a bearish signal; this is a clear indication for the trader to sell. In contrary, an MACD indicator that rises above the signal line, represents a bullish signal; showcasing the upward movement of the asset price.
- Divergence: If the MACD indicator and the security price move in opposite direction or when their path diverges, it clearly indicates that the current trend has come to an end.
- Dramatic rise: Sometimes, the MACD indicator will show a dramatic rise. This rise shouldn’t be mistaken for a bullish signal as this phase is temporary and will return to its normal levels soon.
“Mac-D” is a technique developed by Gerald Appel which is further based on the Exponential Moving Averages (EMA).
Therefore, whilst analysing MACD signals one will come across the below readings:
- Price goes lower.
- MACD signals rises.
- Price recuperating upwards,
- When MACD returns to its normal position it fails to make a lower low.
- If it returns to resistance, it’ll break.
Gerald Appel had designed Mac-D technique to support traders trading in stock market. Apparently, this technique is also used in other trading platforms including forex trading.