Moving average Convergence/ Divergence or MACD indicator has been one of the most popular and widely used technical indicators in trading since 1970. It has become a staple tool for many traders in the stock market and other financial markets. The Moving average Convergence/ Divergence belongs to the family of oscillator technical indicators.
It is designed to measure a trend's features. This comprises its magnitude, direction, and rate of change. In addition, it can be utilised due to its trend-following and price-reversing properties.
To produce the MACD indicator, the first two exponential moving averages (EMAs) are subtracted to produce the main line (the MACD line), which is then utilised in the calculation of an additional EMA to represent the signal line. This process is repeated.
The formula to calculate MACD is - MACD = 12 Period EMA – 26 Period EMA.
The trend is positive when the MACD line is higher than the signal line. In contrast, a bearish trend exists when the MACD line is below the signal line. As seen in the graph, a purchase signal is formed when the MACD line crosses above the signal line. However, a sell signal is generated when the MACD line crosses below the signal line.
After getting comfortable with the principles of technical trend indicators, you should think about some of the best investment techniques. Five incredible trading strategies using MACD Technical Indicator are –
Top 5 Trading Strategies using MACD Technical Indicator
Histogram reversals
It's the distinction between signal lines and MACD. Whenever the current value rises fast in one direction, the histogram expands in height, so when the histogram contracts, the stock moves slowly. The histogram reversal technique is built on establishing patterns as the foundation for putting trades. This means that the approach can be used before the market action occurs. The technique can also be used to exit a trade, with holdings terminated whenever the MACD begins to revert in the other manner.
Money Flow Index
Its primary duty is to concentrate not just on price but also on volume. The reason for this focus is straightforward. Compared to other oscillators of this type, it produces fewer waves and sells signals. It is because there is a price change, as well as volume spikes, required to generate high readings. This strategy combines the MACD stock indicator crossing with the overbought or oversold signals of the Money Flow Index (MFI).
Crossovers
It is a well-known technical indicator that can assist and predict when trends will change. The crossover occurs when the MACD crosses over the signal line, and traders interpret the signal differently depending on which direction it crosses. When the MACD line crosses above the signal line, it is commonly interpreted as bullish, suggesting that prices are expected to rise. When the MACD line crosses below the signal line, this is often interpreted as a negative signal, indicating that prices are expected to decline.
Zero Crosses
When MACD crosses above the zero line, this indicator signals a buy. Sell if the MACD falls below the zero line. This can be a very effective method for communicating the reversal of lengthy, sweeping movements. Nonetheless, caution should be exercised while employing this strategy, as the delayed aspect ensures that warning signs are frequently transmitted too late in volatile markets.
MACD and Relative Vigor Index
It is an indicator that analyses the stock's closing price concerning its market band. The primary purpose of using this technology is to match crossings. If one of the signals crosses, we wait for the other to cross similarly. Whenever this occurs, we have two options: buy it or sell it.
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