Stock markets are a complex place, where many companies offer shares in return for funds. Before you invest your money, it is important to do extensive research as an investor. You should read financial statements and trading charts of the company, as well as examine its performance over time. You'll often come across Moving Average Convergence Diversity (or MACD) during your sharemarket trades. Let's take a look at what it means in detail in this article.
The Moving Average Convergence Divergence oscillator was developed in the late 1970s and is considered one of the most simple and effective momentum indicators. MACD is a trading indicator that is used to analyze stock prices. Analysts can use the indicator to determine directional changes, strength and momentum, as well as the length of a trend in a stock's price.
Let's now understand what MACD is in stocks. MACD can be described as an oscillator which highlights the strength and reversal of a trend. The oscillator value is derived from moving averages. The MACD indicator converts three moving averages into 2. To alert the oscillator of the most recent price movements, analysts use the exponential moving average (EMAs).
The Moving Average Convergence Divergence simply refers to the difference in fast and slow exponential moving mean. An EMA is a type of moving average that places a greater amount of weight and significance on the latest data points. Sometimes, the EMA is also known as the exponentially weighted average. The EWMA responds more strongly to price changes than a slow-moving, average that equally weighs all observations.
Moving Average Convergence Diversity can be calculated by subtracting the long-term EMA from the shorter term EMA. Below are the formulae for MACD and explanations of them.
1. MACD Line: (12-day EMA – 26-day EMA).
2. Signal Line: 9-day EMA for MACD Line
3. MACD Histogram: MACD Line-Signal Line
MACD lines are usually constructed using exponential moving averages that take between 12 and 26 days. MACD is therefore the difference between two EMAs values. (26 periods -12 periods). The signal line is a nine-day EMA, which is then placed above the MACD line. It acts as a trigger for purchase and sell signals. You can trade securities by purchasing them when the MACD crosses over the signal line, and selling them when it falls below the signal. There are many ways to interpret Moving Average Convergence Divergence. The most popular include crossovers and divergences, as well as rapid rises and falls.
You now know what MACD is and how to use it. Now you can do the calculations to see how your stocks are doing. MACD is a unique indicator that combines momentum and trend in one indicator. Investors can use this unique combination of momentum and trends in their daily, weekly, and monthly charts.