When I talk about technical indicators the very first tool that come in my mind is MACD or Moving average convergence divergence. This is the most widely used indicator among the investors.
The reason is, with this indicator you can analyze the momentum of price. MACD gives the interpretation of momentum of the price trend.
It basically shows the difference between two moving averages of prices for different time periods. MACD line generated from the difference of EMA of 12 days and EMA of 26 days. While the signal line is made by 9 days moving average.
Here you will know the tricks and hacks to use MACD to its best.
I always find it hard to remember the technicalities of such market indicators and I know it’s the same with you.
So without wasting your time in such things, I will help you to learn the interpretations and usage of this indicator and how can you ensure your best market timings.
Physical Identification of MACD
MACD graph comprises of two lines
- Signal Line usually red in color
- MACD line usually black in color
Which keep crossing each other with the change in price momentum direction. These lines oscillate above and below a zero line. Any particular time the location of these lines above and below zero line makes a difference in their interpretation which is elaborated subsequently.
How to read MACD and their Key Interpretations
1) Trend direction: The direction of MACD line gives the direction of the trend. Usually, line above zero line signifies bullish nature of market and line below zero line signifies bearish nature of the market.
This is illustrated below in the image. Here you can see that the portion of MACD line moving upward shows the upward movement of price actions.
2) Price strength: The difference in MACD line and the signal line is one of the key interpretation for which MACD is known for. This signifies the momentum of price value. The greater the gap between the MACD line and signal line the greater the strength of market price. So what you need to do here.
This clearly signifies that the market is in an uptrend and the relative strength of price shows that trend will persist so just stay with your stock until you book desired profit percentage.
But as the gap reduces you need to be alert and make sure that very next sessions price may fall. You need to secure your position, verify from other indicators and signals and make a secure exit.
3) Market Timings: Usually investors find a crossover of MACD line over the signal line as their entry-exit timing. When the MACD crosses over the signal line in the upward direction you can assume that market will go in the bullish direction and it’s time to enter the market so that you can book profit with the growing momentum.
While the MACD line crosses below the signal line signifies bearish nature of the market and you need to secure your exit from the market. This way of trading is usually not reliable and done by day traders only.
Long term traders find the lowest possible position of mACD line below signal line to make entry as this would ensure value for their investment.
Read about RSI oscillator here
MACD is one of the vital and essential technical indicator used among traders. It is very responsive and removes lags. You can use this indicator with a combination of other indicators like RSI and Bollinger bands to ensure your move is correct. Remember the market is very uncertain and you are risking your hard earned money. Take each step consciously. The smarter you act the lesser the risk you face.