How to Use the MACD Indicator

The MACD indicator is one of the most widely used technical indicators in every market there is. In the stock market, the currency market, futures, and options, if there is a market someone is using the MACD indicator.

The MACD indicator has the three exponential moving averages that it is made up of. The standard exponential averages have the specifications of 12, 26, and 9. This can be changed macd to your own personal preference. Not everybody uses the same settings, and depending on the time frame of your charts you perhaps should adjust the standard exponential moving average settings.

When the exponential averages that you have defined cross over each other, this is a buy or sell signal depending on the direction of the trend. You can also usually set two horizontal lines at 80 percent and 20 percent and when the moving averages reaches into these two predefined zones these are the overbought or oversold zones. Normally 20 and above is seen as overbought, and 80 is oversold. 20 goes up high, and 80 goes down low. I suppose this can be changed around on your chart if your platform has the capability for that sort of adjustment.

At the very bare minimum, that is how you can trade with a MACD indicator. It is a momentum indicator as well, it shows how fast and how slow the market is trading. You can plot divergence and convergence on the MACD as well. You can draw lines across the top of the MACD moving averages, or below the MACD moving averages and see in advance the probability of where the market is heading.

MACD technical analysis stands for Moving Average Convergence Divergence, and is a trend-following momentum indicator which is used to show how two different flexible price averages relate to each other. You can calculate the MACD by deducting the twenty-six day exponential moving average (also known as the EMA) from the 12-day EMA. Then, a nine-day EMA of the MACD is plotted at the top of the MACD and called the “signal line.” This line functions like a trigger indicator for investors’ buying and selling signals.

If you’re interested in using MACD technical analysis on your own charts, it’s important that you learn the three different methods commonly used for interpreting the moving average convergence divergence. The first method is called the crossover, and it is a bearish signal that appears when the MACD drops lower than the signal line. Investors usually take this signal to mean that it may be time to sell to the highest bidder. With the convergence it can be easy to get “faked out” by the market, so be sure to be patient and wait it out for a confirmed cross above the signal line before seeking a seller’s position.

The second most common MACD technical analysis method is called divergence, and it works opposite to the way that the convergence works. You can spot the divergence by looking for the point where the security price breaks away from the MACD, signally the fact that the current trend has come to an end. The third and finally method is called the dramatic rise, and it can be spotted by waiting for the shorter moving average to break away from the longer term moving average. Investors usually interpret this as a signal that the security has been overbought, meaning that it will soon return to normal price levels.

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