MACD (Moving Average Convergence Divergence) is a stock indicator that analyzes the convergence and / or divergence between multiple moving averages. It is an oscillator used to identify trends and anticipate market developments.
The Moving Average Convergence Divergence is the representation of the difference between the moving averages and the prices, its curve plotting in the graph of the prices evolution , from the MACD zero reference. It is based on the difference between a long-term exponential moving average and a short-term exponential moving average (commonly 26 and 12 periods).
When the indicator rises rapidly, the market is in “over-buy”, unlike a rapid decline must be seen as an oversold market. Comparing the MACD with the exponential moving average of 9 days, allows to detect a buy signal when the indicator is positioned above the MM 9days and a sell signal when it falls below MM 9 days.
The method of construction of this moving averages oscillator gives it a very appreciable reactivity to anticipate the signals.
The MACD calculation
MACD = MME (Source, short MME) – MME (Source, long MME);
Use of moving averages of 12 to 26 periods.
How to analyse and use this indicator
The stock is in an uptrend when the MACD is positive, the short moving average (12 days) is greater than the long moving average (26 days). In contrast, the stock is in a downtrend when the it is negative, the short moving average is below the long moving average.
An upward crossing between the zero reference line and the MACD, means a major reversal to the upside, a downward crossing indicates a downward trend for the stock.
Those signals ,that reveal the market trends, are valuable when it comes to open or close positions.
However, its application is not limited to an indication of bullish or bearish signals. The MACD indicates very clearly:
- The funds trends
- Phases of increase or decrease in the direction of the main trend, upward and downward.
- The correction signals corresponding to a downward phase in an uptrend and an upward phase in a downtrend
Thus a MACD above the zero reference,it indicates an upward trend, allows two readings of the immediate phase which is subject to the stock:
- The indicator above the moving average means that the stock is in an advance phase.
- The indicator below its signal line means that the stock is in a technical correction phase. The passage of the MACD under the zero line indicates clearly that the trend is reversing and becomes bearish.