MACD
Created by Gerald Appel,
The Moving Average Convergence/Divergence is one of the simplest, reliable, and most oftenly used indicators.
It is a momentum oscillator & also a trend-following indicator.
Construction
The construction of this indicator calculates the difference between 2 moving averages and then plots that as 'Fast' line: the second 'Signal' line is then calculated from the resulting 'Fast' line & then drawn on the same panel window as 'Fast' line.
- 'Fast' line - Blue Line
- 'Signal' line - Red Line
The 'standard' MACD values for 'Fast' line is a 12-period exponential moving average & a 26-period exponential moving average & a 9-period exponential moving applied to the fast line, this plots 'Signal' line.
- Fast-line = difference between 12 and 26 exponential moving averages
- Signal-line = moving average of this difference of 9-periods
Stock Indices Technical Analysis & Generating Trading Signals
The MACD is oftenly used as a trend-following indicator & works most effectively when interpreting trending market movements. The 3 common techniques of using MACD to generate signals are:
Stock Indices Trading Crossovers Indices Trading Signals:
Fast-line/Signal Line Crossover:
- A buy stock indices signal is generated when the Fast line crosses above the Signal line
- A sell stock indices signal is generated when the Fast line crosses below the Signal line.
However, in a strong trending market this stock indices signal gives a lot of whipsaws, the best cross over to use would thus be the Zero Line Crossover Signal that's less prone to whipsaws.
Zero Line Crossover Signals:
- When the FastLine crosses above zero center line a buy stock indices trade signal is generated.
- when the FastLine crosses below the zero center line a sell stock indices trade signal is generated.
Divergence Indices Trading:
Looking for divergences between the MACD and stock indices trading price can prove to be very effective in spotting the potential reversal and/or trend continuation points in stock indices trading price movement. There 2 types of divergences:
- Classic Divergence Signals
- Hidden Divergence Signals
Overbought/Oversold Conditions:
MACD indicator is also used to spot potential overbought-oversold conditions in stock indices price action movements.
These levels are generated if the shorter MACD Lines separate dramatically from the median, this is an indication that stock indices trading price action is over-extending & it will soon return to more realistic levels.
MACD and Moving Average Stock Indices Trading Crossover Indices Trading System
This stock indices indicator can be combined with others to form a trading system. A good combination with the Moving Average crossover system. A trading signal is generated when both give a signal in same direction.
Technical Analysis in Stock Indices Trading
