In share trading, the Moving Average Convergence-Divergence or MACD indicator depicts the correlation of two moving averages of the price of a security to monitor trend momentum. This model will test your security and support the moving average you want.. MACD is very popularly used by technical traders and other experts in the financial market.
What is MACD?
MACD (Moving Average Convergence Divergence) is one of the momentum indicators that technical analysts use most often. Near the end of the 1970s, Gerald Appel discovered MACD indicator. By figuring out the difference between two-time intervals that are made up of historical time series, this indicator shows momentum and how stable its direction is. MACD uses two different types of moving averages with different time periods. The momentum oscillator line is found by taking the “difference” between the two moving averages.
When choosing between the 2 moving averages, the main thing to look at is which one has a shorter period. Traders tend to use exponential moving averages, also known as EMA.
How to Read MACD?
Now that you know the MACD meaning, let’s learn about how to read MACD. Also, before understanding how to use a MACD indicator, it’s important to understand how it looks on a graph. The MACD indicator is made up of three essential elements:
1) The fastest moving average is the MACD Line (short-term EMA)
The MACD indicator is determined by subtracting a 12-day short-term EMA from a 26-day long-term EMA. Typically, it is blue.
MACD line is equal to 12-day EMA – 26-day EMA
2) The slowest moving average is the Signal Line. This is also known as long-term EMA.
Red is frequently used to depict price activity turns on this 9-day line.
Signal Line is equal to 9-day EMA of MACD Line
3) The MACD Histogram oscillates above and below a zero line to discern between bullish as well as bearish momentum readings.
The histogram (MACD line – signal line) is the gap between the first two elements. The histogram is positive when MACD is above the signal line and vice versa.
One should look for the following to ensure they have correctly read the signal:
When the histogram grows and the MACD is positive, momentum develops. The price tends to increase in this situation, which is viewed as a “busy” indication.
When both the MACD and the histogram value fall, the asset should be sold because the price is unquestionably declining.
Do professional traders use MACD?
Expert traders use MACD to view momentum, as it is one of the most important aspects while creating strategies. As momentum builds, the price of an asset may break out or break down, alerting traders to the beginning of a trend.