MA Convergence/Divergence Analysis & MACD 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

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 Crossovers Stock Trade Signals:

FastLine/Signal Line Crossover:

• A buy 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 trade signal is generated.
• when the Fast-line crosses below zero center line a sell stock trade signal is generated.

Divergence Trading:

Looking for divergences between the MACD & price can prove to be very effective in identifying potential reversal and/or trend continuation points in price movement. There two types of divergences:

1. Classic Divergence Signals
2. Hidden Divergence Signals

Overbought/Oversold Conditions:

MACD indicator is also used to spot potential overbought/oversold conditions in price action movements.

These levels are generated if the shorter MACD Lines separate dramatically from the median, this is an indication that price action is over-extending & it will soon return to more realistic levels.

MACD and Moving Average Stocks Crossover Strategy

This stock indicator can be combined with others to form a system. A good combination with the Moving Average cross-over system. A signal is generated when both give a signal in same direction.

Analysis in Stocks Trading