MACD is a common technical indicator when analyzing securities, reflecting fluctuations and providing buy and sell signals of the market.
The MACD (Moving Average Convergence Divergence) is also known as the moving average divergence. The MACD line was born in 1979 by inventor Gerald Appel. This is considered one of the most popular and popular technical indicators in stock investment analysis.
MACD is the value found when subtracting the 26-day moving average (EMA) from the 12-day moving average.
MACD = EMA (12) – EMA (26)
Accordingly, if the 12-day moving average is greater than the 26-day moving average, the MACD is positive. Conversely, if the 12-day mean is less than the 26-day average, the MACD is negative.
When analyzing, besides the basic MACD line, there is also a signal line. The signal line will be the 9-day EMA of the MACD. Using a combination of signal line analysis with the MACD line can help detect market entry and exit points.
If the MACD line crosses the signal line from below, it will signal that the price will rise above the current level. This is a signal for investors to consider buying.
If the MACD line crosses the signal line from above, the price is on a downtrend. At this time, investors consider selling orders.
Normally, the MACD line is shown in blue, and the signal line is shown in red.
The MACD histogram can also provide a signal through a divergence/convergence between the MACD line and the price action of a security.
Usually when the stock price goes up, the MACD line also goes up and vice versa. But that is not always the case, when there will be divergence or convergence.
If the stock price is in an uptrend but the MACD line is going down, like the chart below, the 2 red lines go in two different directions, it’s called a divergence.
This warns the stock is likely to reverse from bullish to bearish, investors consider selling stocks when divergence occurs.
On the contrary, if the stock price goes down but the MACD line goes up, the 2 blue lines go in the direction close to each other, this is called convergence.
This is a signal that the stock may reverse from bearish to bullish, investors consider buying stocks when convergence occurs.
However, any analytical technique or indicator will have its pros and cons, and the MACD is no exception. The MACD indicator is not always accurate and can provide misleading and confusing signals.
To use effectively and proficiently the MACD histogram requires investors to be flexible with the market, update quickly as well as know which time frame is reasonable for the MACD to work most effectively.
Moreover, investors can use a combination of MACD with other indicators to reduce risk and confirm more signals.