MACD
The MACD indicator is one of the most popular technical analysis tools. There are three main components of the MACD shown in the picture below:
- MACD: The 12-period exponential moving average (EMA) minus the 26-period EMA.
- MACD Signal Line: A 9-period EMA of the MACD.
- MACD Histogram: The MACD minus the MACD Signal Line.
The MACD indicator is an effective and versatile tool. There are three main ways to interpret the MACD technical analysis indicator, discussed in the next pages:
MACD Moving Average Crossovers
The primary method of interpreting the MACD is with moving average crossovers. When the shorter-term 12-period exponential moving average (EMA) crosses over the longer-term 26-period EMA a buy signal is generated; this is seen on the Nasdaq 100 exchange traded fund (QQQQ) chart below with the two purple lines.
Remember that the MACD line (the blue line) is created from the 12-period and 26-period EMA. Consequently:
- When the shorter-term 12-period EMA crosses above the longer-term 26-period EMA, the MACD line crosses above the Zero line.
- When the 12-period EMA crosses below the 26-period EMA, the MACD line crosses below the Zero line.
Moving Average Crossover Buy Signal
A buy signal is generated when the MACD (blue line) crosses above the zero line.
Moving Average Crossover Sell Signal
When the MACD crosses below the zero line, then a sell signal is generated.
The prior buy and sell signals get a person into a trade later in the move of a stock or future. A more common buy and sell signal is shown in the graph below of the Nasdaq 100 exchange traded fund QQQQ:
Most Common MACD Buy and Sell Signals
MACD Buy Signal
A buy signal is generated when the MACD (blue line) crosses above the MACD Signal Line (red line).
MACD Sell Signal
Similarly, when the MACD crosses below the MACD Signal Line a sell signal is generated.
The MACD moving average crossover is one of many ways to interpret the MACD technical indicator. Using the MACD histogram and MACD divergence warnings are two other important methods of using the MACD.
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