Understanding MACD for Trading Signals
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ScribdTranslationsUnderstanding MACD for Trading Signals
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ScribdTranslationsMACD
The MACD is one of the most powerful technical tools in the arsenal.
of many traders. This indicator is used to check the strength and the
direction of a trend, as well as to define the points of
reversal.
MACD stands for Moving Average Convergence Divergence
Average Convergence Divergence, in English) and shows the relationship of the
two moving averages of the price.
How the indicator works.
The main idea behind the MACD is that it subtracts the longer-term Moving Average.
shorter-term Moving Average period. In this way, it turns a
trend-following indicator at a moment and combines the
characteristics of both.
The MACD has no limits, but it has a zero average, around which
tends to oscillate as the Moving Averages converge, it
they intersect and diverge.
Convergence occurs when the Moving Averages move between
Yes. Divergence occurs when the moving averages move away from each other.
others. The MACD histogram is above 0 when the Moving Average
the 12-period is above the 26-period and below 0
when the shorter Moving Average is below the longer one. Like
result, the positive values of the histogram point to a trend
bullish, while negative values indicate a bearish trend.
How to use.
In general, the market is bullish when the MACD is above 0
and bassist when it is below 0.
The MACD provides traders with several types of signals: line crosses
of signal, levels of overbought/oversold, central line crossings, so
as well as divergences.
1. Signal line crossings.
A bullish crossover occurs when the MACD starts to rise and then crosses above.
above the signal line. A bearish crossover occurs when the MACD
begins to decline and crosses the signal line downwards.
The MACD works better in trends when the price range is
quite narrow. A good strategy may be to establish a
trend and then use only the MACD signals that are online
with this trend.
In the image below, you will see that in a downward trend it is
prudent to only operate negative MACD crosses with the line of
signal.
2. Overbought/Oversold Levels
It is also possible to use the MACD as an oscillator. It is
general knowledge that the market always returns to the average and the fast
Moving Average always returns to being slow. The greater the divergence
entre las Medias Móviles (la mayor o la menor es el histograma del MACD),
the more optimistic or bearish the market is, the greater the likelihood that the
price correction brings the MACD to zero.
As a result, it is possible to operate extreme highs/lows of the MACD
as a signal that the market is overbought/oversold.
As the indicator has no upper or lower limits, you will have to judge
the extremes through the visual comparison of MACD levels. It is important to
note that this type of signals requires confirmation of the action of the
price or other technical indicators.
3. Zero cross.
A bullish zero line crossover occurs when the MACD moves
above 0 to become positive. It can be used as a
confirmation of a bullish trend. A bearish zero line crossover
it happens when the MACD falls below 0 to return
negative. This can be used to confirm a bearish trend.
Here the MACD gives trading signals similar to a two Moving Averages system.
Mobiles. One of the strategies is to buy when the MACD rises.
above the zero line (maintaining the position until the indicator
go back below 0) and sell when the MACD crosses below the
zero line (and close the operation when the indicator is back on
above 0). However, this approach is only cost-effective when they arise
strong trends. During a volatile sideways market, this can result in
in operations with losses.
4. Divergences
In addition, pay attention to the divergence/convergence between the indicator
and the price. The bullish convergence is formed when the price establishes
lower lows, while the MACD histogram lows are
eleven (buy signal). The bearish divergence forms when the price
it renews, while the MACD highs become lower
(sale signal).
Advantages and disadvantages.
One of the greatest advantages of the MACD is that it is an indicator of both
momentum-like trend. However, like all the others
technical indicators, the MACD is not perfect. Its main flaw is that
gives signals later than the price action itself. Additionally, the MACD
does not provide ready-to-apply Stop Loss or Take Profit levels.
Conclusion.
The MACD is a very useful technical indicator. It produces a variety of
signals and can represent a solid foundation of a trading system.
To filter false signals, use the MACD in combination with others.
technical analysis tools.