MACD indicator is an abbreviation of Moving Average Convergence Divergence indicator. It is a technical indicator created by Gerald Appel in the late 1970s. Thomas Aspray improved it by adding a signal line in 1986.
It is a lagging indicator. It helps to analyze the change of rate of price movement, the direction to which a share price is moving. It also helps to determine the strength of the stock market.
A 9 period exponential moving average of this MACD indicator is displayed as the signal line.
Exponential moving averages gives more weight for the recent price action. So the difference in the EMAs represent the trend as well as the momentum of the stock price action.
Since it is based on absolute prices and not on percentage, it is an unlimited indicator or elastic indicator. The numbers goes beyond 100. Therefore there is no overbought and oversold zones.
So, when ever the MACD crosses above this signal line it is a buy signal. It is called bullish crossover. This indicates that the trend is taking its momentum in the upward direction.
When ever the MACD crosses below the signal line it is a sell signal. It is called bearish crossover. This indicates that the trend is taking its momentum in the downward direction.
2. MACD / Zero Line Crossover
At the end of the down trend, the price of a stock makes a lower low swing. But the MACD makes a higher low swing. This is because of the subtle shift in the rate of change of momentum. This is called positive divergence or bullish divergence. It indicates that the down trend is at its end. You can prepare yourself to go long.
Conversely, at the end of an up trend, the price of a stock makes a higher high swing. But the MACD makes a lower high swing, recording the shift in the rate of change of momentum. This is called negative divergence or bearish divergence. It indicates that the up trend is at its end. You can prepare yourself to go short or at least get out of a long position.
Both belong to FTSE 100.
Similarly, in a bear trend the indicator can give a buy signal during a rally.
This false signals can be taken care
Do not make trading decisions based on any one indicator alone. Any indicator works better when the commodities are moving in an up trend or in a down trend.
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