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How to trade efficiently with MACD indicators?

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:

  1. 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. 
  2. 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.
  3. 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:

  1. Price goes lower.
  2. MACD signals rises.
  3. Price recuperating upwards,
  4. When MACD returns to its normal position it fails to make a lower low.
  5. 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.