There are multiple technical indicators in the market, and one of them is the MACD indicator. The Moving Average Convergence Divergence (MACD) indicator presents the association between two moving averages of a stock’s price to determine trend momentum. In this blog, we’ve mentioned everything you should know about MACD as an Indian trader. Let’s begin.
What is a MACD Indicator?
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MACD (Moving Average Convergence Divergence) refers to a momentum indicator in technical analysis, that allows traders to identify bullish/bearish market conditions, potential trend reversals, and buying or selling signals.
Gerald Appel, a technical analyst, created this indicator in 1970. Based on his trading experience, he strongly believed that measuring the momentum behind clearly identified trends could allow traders to make successful trades.
Price fluctuations and market volatility can hinder the identification of underlying trends. Therefore, MACD was created to clearly identify trends, measure the momentum driving those trends, and generate trading signals considering the points of trend acceleration.
How to Read MACD?
Moving Average Convergence Divergence (MACD) indicator forms three lines on the price chart, as presented in the figure below:
- MACD line (fastest moving average): The MACD line is blue and calculated as 12-day EMA (short-term) minus 26-day EMA (long-term). It represents the relationship between short-term and long-term price movements. For instance, the positive value of MACD indicates that short-term EMA is higher than long-term EMA, potentially signaling upward movement and vice versa.
- Signal Line (slower moving average): It is defined as the 9-day EMA of the MACD line, acting as a filter for MACD and smoothing out its fluctuations. When it intersects with the MACD line, the signal line helps identify potential trend reversals.
- Histogram: This showcases the divergence between the MACD and its signal, swinging above and below a zero line. It is calculated as the difference between the MACD line and the Signal line. For instance, a rising histogram showcases that the MACD is above the signal line and indicates strengthened momentum, and vice versa.
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How to Use a MACD Indicator?
Below, we’ve mentioned two major ways to interpret MACD and use it to make informed trading decisions.
Signal Line Crossover
The signal crossover occurs when the MACD line is intersected with the signal line, indicating the possibility of a change in momentum. Using the line’s position, you can determine whether the crossover is bearish or bullish.
When the MACD line crosses above the signal line, the bullish crossover happens and indicates a possible upward trend. It particularly happens when MACD entails positive value.
Conversely, when the MACD line crosses below the signal line, a bearish crossover occurs and indicates downward momentum. This occurs particularly when the MACD has a negative value.
Zero Line Crossover
When the MACD line goes above or below the zero line, it results in the Zero Line Crossover. It indicates the change in trend direction and allows traders to determine the bearish and bullish signals.
When the MACD line crosses above the zero line, it indicates the possible shift from a downtrend to an upward trend. In contrast, when the MACD line falls below the zero line, it indicates the possible shift from an uptrend to a downward trend.
Moreover, the distance between the zero line and the rising/falling MACD line represents the strength of the bullishness and bearishness.
You should use other technical analysis tools as well along with MACD indicators to make informed trading decisions.
Conclusion
The Moving Average Convergence Divergence is one of the versatile tools that allow traders to potentially identify trends, assess momentum and indicate signals. It helps with identifying trend reversals and overbought oversold conditions. To understand the trading strategies in depth, check out Upsurge.club’s share market courses in Hindi.
