Technical Analysis: Understanding MACD

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Technical Analysis: Understanding MACD

The
        Moving Average Convergence/Divergence (MACD) is a technical indicator used to
        gauge the price momentum and trend. The MACD is composed of three indicators:
        the MACD line, the signal line and the histogram. The MACD line is calculated
        by subtracting a 26-period exponential moving average (EMA) from a 12-period
        EMA.

The signal line is a 9-period EMA of the MACD line, and it's used with the
        MACD to gauge the trend direction when the two lines cross to the upside or
        downside. The histogram visually displays the magnitude of the distance between
        the MACD line and the signal line and it's above a baseline when the lines
        cross to the upside and below the baseline when the lines cross to the
        downside.


         
   



   




   




         
   

The
        MACD indicator has many uses with the main one as a trend indicator. When the
        MACD line crosses the Signal line to the upside it can indicate the beginning
        of an uptrend momentum and when it crosses the Signal line to the downside it
        may signal the start of a downtrend momentum. See some examples in the chart
        below.


         
   

   




       
   



         
   

The
        other use you can notice in the chart above is how the histogram can signal
        overbought or oversold conditions when the two lines diverge too much. When the
        histogram rises well above the baseline the price momentum may fade a bit as it
        becomes overstretched and prone to a pullback. The same happens when the
        histogram goes way below the baseline.


         
   

As
        for any other indicator, it's better to complement the MACD with other
        technical concepts or indicators to give you more structure and avoid false
        signals, especially in a rangebound market. For example, taking the previous
        chart, for a long trade you could use the previous swing level acting as
        support with a Fibonacci 38,2% retracement level as confluence. Then, you
        either wait for the MACD to confirm the end of the pullback and enter or you
        can wait more and enter on the next resistance breakout.


         
   


           

       
       
       
   


         
   

This
        article was written by Giuseppe Dellamotta.

Source: Technical Analysis: Understanding MACD

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