The technical analysis indicator of the week - MACD

Updated: May 9

Hi There

After a long break, the Indicator of the week is back!.

This time I’m going to talk about one of the best (if you know when and how to use it) indicators out there, the MACD.

There are a lot of MACD strategies but i only use few of them that suits my needs.

MACD refers to Moving average convergence and divergence.

The indicator uses two exponential moving averages, which help to measure momentum in the price.

The MACD Line is simply the difference between these two moving averages plotted against a center line. The center line is the point at which the two moving averages are equal. Along with the MACD and the center line, an exponential moving average of the MACD itself is plotted on the chart to produce the Signal Line. The idea behind this momentum indicator is to measure short-term momentum compared to longer term momentum to help signal the current direction of momentum.

Another aspect of the MACD is the Histogram, MACD Histogram is the difference between the MACD line (blue line) and the MACD signal line (Orange line).

You can’t just search for MACD crossover or divergence and base your strategy only on those signals, need to combine them with other strategies and techniques in order to reduce false signals.

MACD is a trend-following momentum indicator, MACD works best in a trend market and almost useless in a sideways market.

MACD can help us to find reversal areas and continuation signals.

  • Moving Average Crossover Buy Signal Signal is generated when the MACD crosses above the Signal line.

  • Moving Average Crossover Sell Signal Signal is generated when the MACD crosses below the Signal line.

  • MACD Divergences - The EMA lines or the histogram bars can indicate a slowing of the strength of the trend (in either direction). This would subsequently be an early indication of a change in the direction of the trend. For example, the graph shows an up trend and the MACD histogram bars getting lower and lower.

I’m using the MACD to timing (not all the time) my entry and exit point in a Extreme situations. I’m not buying/selling every crossover, i’m looking for extreme points.

On those point we can look for weakness of the trend, the correction move are bigger than previous correction moves, we can confirm it with a Reversal candles, I’m using bullish hammer, engulfing and shooting star in order to confirm reversal points.

I use MACD in a daily charts in order to understand the power of the trend of find the reversal/divergence point.

See an example about how the MACD can help us to identify the power of the trend, this way we can make a decision whether to buy or not. Sometimes we buy a stock in an uptrend and we think that the road is clearly open but we actually buying the end of the trend or beginning of consolidation/distribution.

If you think your friends would find this useful, please share it with them – I’d really appreciate it.

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