Moving Average Convergence/Divergence Stock Analysis & MACD Trading Signals
Created by Gerald Appel,
The Moving Average Convergence/Divergence is one of the simplest, reliable, & most oftenly used indicators.
It is a momentum oscillator and also a trend-following indicator.
Construction
The construction of this indicator calculates the difference between two moving averages and then plots that as 'Fast' line: a second 'Signal' line is then calculated from the resulting 'Fast' line & then drawn on the same panel window panel as 'Fast' line.
- 'Fast' line - Blue Line
- 'Signal' line- Red Line
The 'standard' MACD values for 'Fast' line is a 12-period exponential moving average and a 26-period exponential moving average and a 9-period exponential moving applied to the fast line, this plots the 'Signal' line.
- FastLine = difference between 12 and 26 exponential moving averages
- Signal-line = moving average of this difference of 9-periods
Stocks Trading Analysis & Generating Trading Signals
The MACD is commonly used as a trend-following indicator & works most effectively when analyzing trending market movements. The three common techniques of using MACD to generate signals are:
Stocks Trading Crossovers Stock Trading Signals:
FastLine/Signal Line Crossover:
- A buy stock signal is generated when the Fast line crosses above the Signal line
- A sell stock signal is generated when the Fast line crosses below the Signal line.
However, in a strong trending market this stock signal gives a lot of whipsaws, the best cross over to use would thus be the Zero Line Crossover Signal that's less prone to whipsaws.
Zero Line Crossover Signals:
- When the Fast-line crosses above zero center-line a buy stock trade signal is generated.
- when the Fast-line crosses below zero center line a sell stock trade signal is generated.
Divergence Stock Trading:
Looking for divergences between the MACD & stocks price can prove to be very effective in identifying potential reversal and/or stock trend continuation points in stocks price movement. There two types of divergences:
- Classic Divergence Signals
- Hidden Divergence Signals
Overbought/Oversold Conditions:
MACD indicator is also used to spot potential overbought/oversold conditions in stock price action movements.
These levels are generated if the shorter MACD Lines separate dramatically from the median, this is an indication that stocks price action is over-extending & it will soon return to more realistic levels.
MACD and Moving Average Stocks Trading Crossover Stock Trading System
This stock indicator can be combined with others to form a trading system. A good combination with the Moving Average cross-over system. A signal is generated when both give a signal in same direction.
Technical Analysis in Stocks Trading
