MACD measures changes in momentum in the stocks price. It can be a very useful tool for a technical analyst and can help you identify strong signals that you can make trading decisions from. For beginners, using MACD alone with your candlestick charts can be a good way to start as a chartist. Remember, you may add any number of indicators over-time. For this course we are going to focus on understanding and implementing MACD as our primary indicator. It will be important to understand how to use it, what it measures and when to act on MACD signals.
In this example you see a diagram of some of the basic components of the MACD indicator. MACD is not an oscillator – yes it does move up and down – but it moves up and down over its Zero Line. There are two lines present on the MACD. They are an 8 and 17 period moving average. MACD measurements are derived from the relationship of these two moving averages have. When the moving averages cross up it is a bullish signal. When they cross down it is a bearish signal.
The Zero Line is a significant zone for the MACD indicator. Whenever the two moving average lines are above Zero then you have a confirmed upward trend. Whenever the two lines are below zero you have a confirmed downward trend. This is important information. If you see the lines cross down below zero that should force you to analyze the trend of the stock, its pivot points and support and resistance zones and then confirm the reading. Changes in the MACD are a result in changes in the stocks price and trend. Remember all indicators are lagging in the sense that they measure information and price changes that have already happened. In that sense, all technical analysis is lagging. That’s ok; the past can give us vital information about what may be happening in the future.
MACD and Entry Points
One of the most popular uses of the MACD indicator is to use the line crosses as a signal to buy or sell a stock. When the two lines cross each other that is an indication that price is changing direction. Buying stock on an upward cross can be smart. Remember, indicators are not used solely on their own though. If a stock is at a support zone, in an uptrend or a strong fundamental stock AND the MACD crosses up – you have a very powerful signal. Traders who combine indicator analysis with other forms of technical analysis generally get better results and make more money than those who just rely on the signals blindly.
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