What is MACD indicator?


MACD indicator is one of the simplest and most effective momentum indicators available.MACD indicator turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average from the shorter moving average. As a result, the MACD(Moving Average Convergence-Divergence) offers the best of both worlds: trend following and momentum. MACD indicator fluctuates above and below the zero line as the moving averages converge, cross and diverge. Traders can look for signal line crossovers, centerline crossovers and divergences to generate signals. Because the MACD is unbounded, it is not particularly useful for identifying overbought and oversold levels. By using MACD indicator you will be able to unleash your trading expertise in a significant level. Surely this will add an extra ease for your successful trading.

MACD indicator for metatrader

MACD indicator is a momentum indicator that is made up of three signals and is most often calculated by the closing price but can include any historical price data. As it is based on moving averages, it is very popular for technical traders who use it as a confirming indicator for online options trading. This is due to the volatility involved in trading options and the MACD being a stable indicator that prevents traders from getting in and out to early.
The three signal lines are the MACD line, the average line and the divergence. Often novice traders will mix up the MACD indicator with the specific MACD line, which can cause initial confusion and frustration. The MACD line is the difference of a fast EMA (exponential moving average) and a slow EMA. A signal line or ‘average line’ is where the MACD line is charted over a period of time with an EMA of the MACD. Any divergence between the signal line and the MACD line would typically be shown as a histogram or bar graph. The MACD line can show trend changes in a stock if comparing different periods of EMA’s. This can allow a trader or analyst to pick up any small shifts in the stock’s trend.
Often referred to as a lagging indicator, the MACD should not be used with stocks that are trading erratically or are not trading within range when price trends is a metric being utilized. Despite its lagging nature, the MACD does not lag quite as much as a basic moving average crossing indicator.
By subtracting the 26 day exponential moving average (EMA) from the 12 day EMA results in the MACD. From here, a 9 day EMA of the MACD or ‘signal line’ can now be plotted which can then be used as a trigger for buying and selling signals. Some important things to notice with the MACD are crossovers, divergence and dramatic rise. A crossover is a bearish signal and is shown when the MACD drops below the signal line. This can indicate that it may be time to sell. However, when the MACD rises above the signal line the opposite occurs and indicates a bullish signal and could result in the price gaining upward momentum. To prevent entering a position to early, it is crucial for a trader to wait until the crossover has occurred before taking a position. Divergence refers to the security price diverging away from the MACD. This again is vital for a trader to be aware of as it signals the end of a current trend. Finally, a dramatic rise is a signal that a stock will return to normal levels soon after being overbought. It occurs when the shorter moving average begins to pull away from the longer moving average. Overall, the zero line often indicates a support and resistance for the MACD indicator and therefore when it is above zero, it is a sign of upward momentum as the short term average will be above the long-term average. Conversely, the opposite is true when the MACD is lower than zero.
As with most indicators, the MACD is only useful if applied in the correct context. If used incorrectly, a false positive can occur where a sudden decline in a stock happens after a bullish crossover. A false negative reading with the MACD would be the opposite of this where there is no bullish crossover despite a stock accelerating upwards very suddenly. Therefore, an astute trader will use a filter strategy to reduce the chances of false signals. The downside to this is that there can be missed opportunities and missed profit.

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