Moving Average Convergence/Diversion (MACD) Indicator
MACD is used to identify the over trend of an asset and most notably the momentum and Bearish Divergence creates a selling opportunity while Bullish Divergence creates a buying opportunity trend duration. MACD is very informative due to the reason that it makes use of two indicators.
First, MACD employs two Moving Averages of varying lengths (which are lagging indicators) to identify trend direction and duration. Then, MACD takes the difference in values between those two Moving Averages (MACD Line) and an EMA of those Moving Averages (Signal Line) and plots that difference between the two lines as a histogram which oscillates above and below a center Zero Line.
The histogram is used as a good indication of a security’s momentum.
MACD has three major components:
- The MACD line obtained by subtracting the long-term EMA from the Short-term EMA.
- The Signal line is the EMA of the MACD line.
- The MACD histogram is a result of the difference between the MACD line and the signal line.
- The difference between those two lines oscillates around the zero line.
What to Look for?
- Signal Line Crossovers:
Signal line crossovers are of two types, Bullish and Bearish.
- If the MACD line crosses over the signal line towards the top, it is a bullish crossover.
- If the MACD line crosses over the signal line to the bottom, it is a bearish crossover.
2. Zero Line Crossovers:
When the MACD line crosses over the zero line, i.e., when it moves from positive to negative, it is a bullish crossover.
It is a bearish crossover if the MACD line crosses the zero line over to the negative from the positive side.
When the price records low, however, the MACD records higher, a bullish divergence occurs.
Moreover, the opposite is true for a bearish divergence.