MACD (Moving Average Convergence Divergence)
What is MACD?
How to use it in stock trading
MACD is a popular technical indicator that is used to identify changes in the strength, direction, momentum, and duration of a trend in a stock’s price. It is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A 9-day EMA of the MACD, called the “signal line,” is then plotted on top of the MACD to act as a trigger for buy and sell signals.
When the MACD line crosses above the signal line, it is a bullish signal, indicating that the stock’s upward momentum is increasing and that it may be a good time to buy. Conversely, when the MACD line crosses below the signal line, it is a bearish signal, indicating that the stock’s downward momentum is increasing and that it may be a good time to sell.
In addition to the crossover signals, the distance between the MACD line and the signal line can also be used to gauge the strength of the current trend. The greater the distance between the two lines, the stronger the trend.
Another way to use the MACD is to look for divergences between the MACD and the stock price. A bullish divergence occurs when the MACD is making new highs while the stock price is making new lows, indicating that the stock’s downward momentum is weakening and that the trend may be reversing. A bearish divergence occurs when the MACD is making new lows while the stock price is making new highs, indicating that the stock’s upward momentum is weakening and that the trend may be reversing.
It’s important to keep in mind that the MACD is a lagging indicator, meaning that it will only confirm a trend after it has already begun. As such, it should not be used as a sole indicator for making trading decisions. It’s always recommended to use multiple indicators and also to use it in conjunction with a proper risk management strategy.
In summary, the MACD is a powerful technical indicator that can be used to identify changes in the strength, direction, momentum, and duration of a trend in a stock’s price. By understanding how to interpret the crossover signals and divergences, traders can use the MACD to make more informed buy and sell decisions.
Share Predictions mobile app provides technical indicators, including MACD, for both common stocks and ETFs from stock markets in USA. You can view and analyze trends on the chart and easily identify potential bullish and bearish signals based on MACD and Signal Line.