MACD
The Moving Average Convergence Divergence (MACD) is a technical indicator used to identify trends and momentum in trading. It consists of two moving averages, the MACD line and the signal line, and a histogram that shows the difference between them. When the MACD line crosses above the signal line, it generates a bullish signal, indicating a potential buy opportunity. Conversely, when the MACD line crosses below the signal line, it produces a bearish signal, suggesting a potential sell opportunity. Traders use MACD to confirm trends and spot potential reversals, making it a valuable tool for making informed trading decisions.
what happens when one trend meets another? Let’s say you zoom out to the daily view and see a rising trend, then on the weekly view you see it’s part of a falling trend? Who wins? Well, whichever’s stronger, of course. And that’s how we get the MACD We measure the two trends against the moving average they create.
The default MACD, affectionately called by some, the Mac-D, uses a long 26-period exponential moving average and a short 12-period one. We subtract the long from the short and show the result on an oscillator under the chart. If the 12 period is smaller than the 26 day, the result will be smaller than zero. If larger, the result is HIGHER than zero. The result is our MAC-D.
Now, if the MAC-D is less than 0 but rising strongly, the 12-day is stronger and the asset is probably oversold. If it’s ABOVE zero and headed distinctly south – we’re overbought. If the MAC-D and the original price line are in dramatic contradiction, there’s a trend that’s weakening.
Still, that doesn’t really tell us what to do. And so, we create a 9-day exponential moving average of the MAC-D and superimpose it on top. We call that our trigger line. Where the MAC-D crosses down over the trigger, we have a confirmed down trend. If it crosses UP over the trigger – a buy signal.
Of course, that happens a lot, and we want to narrow down our buy and sell signals. For that, if you download the MAC-D histogram indicator – it’s not on Metatrader by default, there’s the histogram – an MAC-D of the MAC-D and its trigger line. Again, we subtract the trigger from the MACD and get an oscillator that appears on top of our MAC-D. If the histogram diverges too much from the original priceline, simply ignore the signal you got from the MAC-D-trigger crossover.