What is Moving Average Convergence-Divergence (MACD)?
MACD is a popular technical indicator that is widely use by traders. It is created by Gerald Appel in the 1960s. MACD consists of three exponential moving averages. It gives a bullish signal when the two lines crossover. To create MACD:
1. Calculate a 12-day EMA of closing prices.
2. Calculate a 26-day EMA of closing prices.
3. Subtract the 26-day EMA from the 12-day EMA, and plot their difference as a solid line. This is the fast MACD line.
4. Calculate a 9-day EMA of the fast line, and plot the result as a dashed line. This is the slow Signal line.
– When the fast MACD line rises above the slow Signal line, it gives a bullish signal.
You don’t need to know the above calculation to trade with this technical indicator as it is built in with most charting softwares.
How to trade with MACD?
A stock pattern is considered to be bullish when the fast MACD line is above the signal line. When the fast MACD line cross over the signal line, it generates a great buy signal. Let’s look at some charts.
1. AES – Notice there is a MACD crossover around 12/6, and the stock has risen since then.
2 YMI – Noticed again the stock keep risen after the MACD crossover was formed. If you want to make more money on this stock, you can buy the stock when the MACD line approaching the signal line. However, that will means you will need to take greater risk.
My Opinion on MACD
MACD crossover works pretty well for me. However, I never trade any stock base solely on MACD signal. I always combine it with Candlestick and Stochastic. If I see a bullish candlestick pattern and the slow macd is about to cross the signal line, then I will watch the stock closely and may buy it the next day.
Click here to get a list of latest stocks with a MACD crossover pattern.
What is MACD-Histogram?
MACD-Histogram derives from MACD. When it is above 0, the signal is positive and it is negative when it goes below 0. The following shows how a MACD-Histogram is calculated.
MACD-Histogram = MACD line – Signal line
MACD-Histogram is created by the difference between the MACD line and the Signal line, and plots the difference as a histogram. If the fast line is above the slow line, MACD-Histogram is positive and plotted above the zero line. If the fast line is below the slow line, MACD-Histogram is negative and plotted below the zero line. When the two lines touch, MACD-Histogram equals zero.
