MACD Moving Average Convergence Divergence

A positive MACD indicates upward momentum and means the average price of the last 12 periods is higher than the average price of the previous 26 periods. A negative MACD shows downward momentum as the average price of the last 12 periods is lower than the average price of the last 26 periods. You can also draw trendlines or support and resistance levels directly on your MACD indicator.

How Is MACD Calculated?

A bearish divergence that appears during a long-term bearish trend is considered confirmation that the trend is likely to continue. Both measure the momentum of an instrument, but they measure different factors. The 10 best penny stocks to buy now RSI may show a reading above 70 (overbought) for a sustained period, indicating an instrument is overextended to the buy side. In contrast, the MACD may indicate that the instrument’s buy-side momentum is still growing. Either indicator may signal an upcoming trend change by showing divergence from price (price continues higher while the indicator turns lower, or vice versa).

1. The second component, which is the signal line, is the moving average of the MACD line.
2. As trading proceeds, you observe the MACD initially crossed the zero line from below, then crossed again from above.
3. Clearly, when price hits a strong area of support we can be more confident that the MACD’s sign is reliable.
4. However, most traders tend to wait for the confirming cross above the signal line before entering a position in order to avoid false positives.
5. Some traders that utilize this strategy wait for a “trigger,” or some sort of confirmation of the divergence.
6. Similarly, when the MACD crosses below the MACD Signal Line a possible sell signal is generated.

MACD divergences as early entries

The goal is to trade in the direction suggested by the new momentum conditions. Crossovers thus time entries after trends, prove themselves, reducing risk. Out of all MACD signals, its ability to flag potential trend changes through simple line intersections makes crossovers one of the most insightful applications of this powerful indicator. MACD (moving average convergence/divergence) is a technical indicator of momentum that uses moving averages to determine a trend’s strength.

In that case, you study guide for the new trading for a living could look for spikes in volume, like in the image below. Above you see how the RSI came from below 20, and how the MACD cross confirmed the imminent swing to the upside! As you see, once we spotted that the MACD line is too far from the signal line, there was a reversion of the trend. Two times, you see how the MACD line deviates from the Signal line, and how that is followed by a reversion back to the signal line. This article and its contents are for educational purposes only and should not be considered trading advice.

What is the basic MACD indicator formula?

The RSI aims to spot overbought and oversold regions by calculating the average price gains and losses for the given period of time, and then outputs a value between 0 to 100. When the RSI is over 70 it’s traditionally considered to be overbought, and when it’s under 30, the market is considered oversold. To get the signal line,  you apply an exponential moving average to the MACD line. The signal line acts to smooth the MACD line, and is plotted as a red line in the image below. As you will see later,  traders may use crossovers between the signal line and MACD line as entry signals.

We owe a debt of gratitude to Gerald Appel for forever changing technical trading. If the two moving averages are diverging, then momentum is increasing, and if they are converging, then momentum is weakening. The distance between the two is graphed in what is called a MACD line, as seen in black in Figure 1.

The histogram is positive when MACD is higher than its nine-day EMA, and negative when it is lower. The signal line is calculated by taking the difference between the two EMAs, and from that number create a nine-day moving average. Swing trading is somewhere between day-trading and long-term trading.

A divergence occurs when MACD projects highs or lows that exceed the corresponding highs and lows Was ist on the price. The MACD histogram is primarily used to predict price fluctuations and trend reversals. A histogram is reflected above the baseline when the MACD line (blue line) crosses the signal line (orange line) from below. When the MACD line (blue line) is below the signal line (orange line), a histogram is reflected below the baseline. Another MACD drawback is its inability to make comparisons between different securities.

Firstly, divergence can often signal a false positive, i.e., a possible reversal, but no actual reversal occurs. This is because prices often demonstrate a few surges or plunges as market participants set off stops to match the supply and demand in the order flow. Secondly, divergence doesn’t forecast all reversals, i.e., it predicts too many reversals that don’t occur and not enough real price reversals. Namely, if the crossover indicates an entry point, but the MACD line indicator is below the zero line (negative), market conditions are still likely to be bearish. MACD helps reveal subtle shifts in the strength and direction of an asset’s trend, guiding traders on when to enter or exit a position.

Both the S&P 500 and MACD have been making higher highs in recent weeks, which suggests that the uptrend may continue. Despite MACD’s obvious attributes, just like with any indicator, the trader or analyst needs to exercise caution. There are just some things that MACD doesn’t do well which may tempt a trader regardless. Most notably, traders may be tempted into using MACD as a way to find overbought or oversold conditions. Remember, MACD is not bound to a range, so what is considered to be highly positive or negative for one instrument may not translate well to a different instrument.