MACD indicator
MACD or moving average convergence divergence is a popular indicator used in technical analysis of stocks. Various trading strategies are also there using MACD. It is a trend following indicator.
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MACD is made with 3 things. They are
- A faster moving average.
- A slower moving average.
- Average of difference between them.
Default MACD Settings
Default setting of MACD is 12, 26 , 9 Where 12 is faster moving average, 26 is slower moving average. 9 is 9 bar average of difference between them.
Main components of MACD are,
- MACD Line
- Signal line
- Histogram
MACD Calculation
MACD Line
MACD line is calculated by subtracting slower moving average from faster moving average.
In default MACD , 26 period EMA is subtracted from 12 period EMA. That means MACD will have a positive value when 12 EMA is above 26 EMA and negative value when 26 EMA is above 12 EMA.
Signal Line
9 period average of MACD line is called signal line. It is plotted on top on MACD line.
MACD Histogram
MACD histogram shows distance between MACD line and signal line. If MACD line is above signal line, histogram will be green above above baseline. If MACD line is below signal line, Histogram will be red and below baseline.
Main use of histogram is to measure bullish and bearish momentum.
MACD cross over strategy
MACD cross over strategy is a commonly used strategy. Traders buy a stock when MACD line crosses above signal line and sell when MACD line crosses below signal line. MACD crossing shows a momentum shift. So that property has been used here to develop this strategy.
But being a lagging indicator, the success rate of this strategy may be lower. But you can tweak it to make better by practice and adding some more parameters for entry and exit.
MACD Divergence Strategy
MACD being a momentum indicator, you can use it to find divergences. Divergence between price and MACD indicator can be a strong tradings signals.
I have done 2 videos on divergence. Please check those posts for more details about this.
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