The Moving Average Convergence Divergence (MACD) is a popular trend-following momentum indicator used in technical analysis to gauge the strength, direction, and duration of a trend. It helps traders identify potential buy and sell signals based on the relationship between two moving averages of a security’s price.
Parts of MACD
- MACD Line: The difference between the 12-day Exponential Moving Average (EMA) and the 26-day EMA.
- Signal Line: The 9-day EMA of the MACD Line.
- MACD Histogram: The difference between the MACD Line and the Signal Line.
MACD Formula
MACD=12-Period EMA−26-Period EMA\text{MACD} = \text{12-Period EMA} – \text{26-Period EMA}MACD=12-Period EMA−26-Period EMA
How to Use MACD
Identifying Trends
- Bullish Signals: Occur when the MACD Line crosses above the Signal Line, indicating upward momentum.
- Bearish Signals: Occur when the MACD Line crosses below the Signal Line, indicating downward momentum.
Analyzing Confluential Strategies
MACD can be more effective when used in conjunction with other indicators or strategies. Here are some examples:
- Relative Strength Index (RSI): Combining MACD with RSI can help confirm signals. For instance, a bullish MACD crossover alongside an RSI reading below 30 (indicating the asset is oversold) strengthens the buy signal.
- Support and Resistance Levels: Using MACD in conjunction with support and resistance levels can help identify stronger buy and sell signals. For example, a bullish MACD crossover occurring near a strong support level can signal a potential price increase.
- Moving Averages: Using additional moving averages, such as the 50-day and 200-day EMAs, can provide more context. A bullish MACD crossover above these moving averages is a stronger buy signal.
- Divergence: Observing divergence between MACD and the security’s price can indicate potential reversals. For example, if the price is making higher highs while MACD is making lower highs, it might signal an impending bearish reversal.