The MACD Indicator – How Does It Work?
The Moving Average, Convergence/Divergence indicator, is a momentum trading oscillator that commonly trades with trends.
Besides being an oscillator, you cannot use it to tell if the stock market is overbought or depressed. It is shown on the graph as two curved lines. When the two lines cross, it’s like using two moving averages.
How does the MACD indicator work?
Above zero on the MACD means it is bullish, and below zero means it is bearish. Second, it’s good news when the MACD goes up from below zero. When it starts to turn down just above zero, it is reflected as bearish.
The indicator is considered positive when the MACD line moves from below the signal line to above it. Hence, the signal gets stronger the farther one goes below the zero line.
The reading could be better when the MACD line goes below the warning line from above. The signal gets stronger as it goes above the zero line.
During trading ranges, the MACD will oscillate, with the short line moving over the signal line and back again. When this happens, most people who use the MACD don’t make any trades or sell any stocks to try to lower the volatility of their portfolios.
When the MACD and price move in different directions, it backs up a crossing signal and strengthens it.
Does MACD have any drawbacks?
Like any other indicator or signal, the MACD has pros and cons. A “zero cross” occurs when the MACD passes from below to above and back again in the same trading session.
If prices kept going down after the MACD crossed from below, a trader who bought would be stuck with a losing investment.
MACD is only useful when the market is moving. When prices are between two points of resistance and support, they move in a straight line.
Since there isn’t a clear up or down trend, MACD likes to move toward the zero line, where the moving average works best.
Also, the price is usually above the previous low before the MACD crosses from below. This makes the zero-cross a late warning. This makes it difficult for you to get into long positions if you want to.
FAQs: questions people often ask
What can you do with the MACD?
Traders can practice the MACD in diverse ways. Which one is better relies on what the trader wants and how much experience they have.
Does the MACD strategy have a favorite indicator?
Most traders also use support, resistance levels, candlestick charts, and the MACD.
Why do 12 and 26 show up in the MACD?
Since traders use these factors most often, MACD usually uses 12 and 26 days. But you can figure out the MACD using any days that work for you.
Bottom line
Moving average convergence divergence is no doubt one of the most prevalent oscillators. It has been shown to help find trend reversals and momentum. Finding a way to trade with MACD that fits your trading style and goals is very important.
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