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Moving Average Convergence Divergence (MACD) MACD is one of the indicators that almost all traders know when they start using technical analysis. This indicator is so popular mainly because the movements seem to be in line with the price. It makes MACD one of the indicators that are easy to look at and even easier to understand. There are countless methods for using MACD and this article will take a deeper look at what MACD is. What is MACD? MACD, or Moving Average Convergence Divergence, is classified as an oscillator. It is a momentum indicator designed to monitor a trend, almost similar in function to the Stochastic Oscillator and also the RSI (relative strength index). The basic composition of MACD consists of 3 Exponential Moving Averages (EMA): EMA 26, EMA 12, and EMA 9. In particular, EMA 26 and EMA 12 generate the MACD, which has the following formula: MACD = 12 EMA - 26 EMA After we obtain the MACD, the next observation is MACD and SIGNAL LINE (EMA 9). The difference between the MACD line and the Signal line is plotted on the chart in the form of a histogram. Traders use the histogram to read the bearish or bullish momentum of an asset. Histogram 0 is also known as the baseline and is obtained when the MACD line and the signal line are at the same point. This point is also known as the crossover between MACD and the signal line. If MACD is above the signal line, the histogram will show a positive value above the baseline. On the other hand, if MACD is below the signal line, it will generate a negative value below the baseline. JOIN OUR CONTEST!

Analyzing MACD MACD is a multi-functional indicator that can be used in various situations to read several things. This article will discuss its three main uses: as a signal to Buy or Sell, to determine overbought and oversold conditions of an asset, and to identify the divergence in the market.

MACD Crossovers - BUY / SELL Signals Crossover is an easy concept to understand and crosses between MACD and signal line are often used as signals to enter and exit a position. When MACD drops below the signal line, it is a bearish signal indicating that it may be time to sell. On the other hand, when the MACD goes above the signal line, the indicator gives a bullish signal that the asset price may be going upward. The problem with this basic concept is many traders misinterpret the signals given by MACD. If traders buy and sell every time there is a crossover between MACD and signal line, they are prone to make uninformed decisions which will result in considerable loss. Keep in mind that MACD is a trend following momentum indicator. We need a basic understanding of the difference between a trending market and a sideways market. Traders must understand how to read the underlying trend before using crossovers, otherwise, MACD crossovers will give a lot of false signals.

MACD to Identify Divergence The main function of MACD is to detect divergence in the market. Divergence is where the price and the oscillator do not move in the same direction. Bearish divergence only occurs in an uptrend/bullish market and can be identified when prices reach a higher high but the MACD hit a lower high. This is a sign of a trend reversal that indicates the end of an uptrend or bullish market.

Bullish divergence only occurs in a down trending/bearish market and can be identified when prices reach a lower low but the MACD hits a higher low. This is a sign of a trend reversal that indicates the end of a downtrend or bearish market.

We will go deeper into divergence and its various types in a separate article.

MACD as Overbought / Oversold Indicators

Overbought and oversold can be identified on the MACD line when there is a fast up and down movement. This is seen when the 12 EMA moves away from the 26 EMA which makes the MACD line goes up or down quickly.

When used for measuring overbought and overbought conditions, MACD is rather complicated to read and use quickly. Many traders switch to other indicators if they want to find out overbought and oversold conditions. Other oscillators such as the RSI and Stochastic are more accurate in identifying overbought and oversold conditions. So even though MACD can be used for that purpose, it is easier and faster to use along with other oscillators. The Disadvantage of MACD MACD is quite versatile as an indicator as it can provide a lot of information, but of course, nothing is perfect. MACD is based on the observation of the difference of 2 EMA, which is already the average price, so the relationship between MACD and price is driven further away. MACD can be considered as the average value of a moving average which is considered a lagging indicator. On the plus side, MACD could be used to filter out market noise. However, since the MACD calculation and observation often give late signals, it's not suitable to follow and detect price changes in real-time. Interestingly, MACD is used to look for divergences in the market so we can anticipate changes in the market early. So I leave the choice to you, is MACD a lagging indicator or a leading indicator? Best regards, OctaFX Team Did you like this article? Yes   Not really

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