What is The MACD Indicator And How Can It Help You Trade?
The MACD (moving average convergence divergence) is a momentum indicator equal to a security's 12-day exponential moving average (EMA) minus its 26-day EMA. A 9-day EMA of the MACD, called the signal line, is plotted with it, and the histogram shows the gap between the two. Traders read a MACD cross above the signal line as a bullish signal and a cross below as bearish, and watch for divergence, when price and MACD move in opposite directions, as a warning that a trend may be weakening. In Excel, MarketXLS returns it with =MACD("AAPL"). Like all indicators, MACD produces false signals and lags price; this is educational, not trading advice.
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An Overview of The MACD Indicator
The MACD indicator is a powerful tool designed to help traders identify buy and sell signals, as well as entry and exit points, within a given security. By combining the two components of a standard trend indicator – the Moving Average and Momentum – the MACD indicator is able to capture the nuances of a security’s movement.
The MACD indicator is composed of three components: a signal line, the MACD line and a histogram. The signal line is a 9-day exponential moving average of the MACD line and is used to generate crossover signals. The MACD line is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. Last, the histogram is used to visualize the difference between the MACD line and signal line by forming a graph of vertical bars.
How To Interpret The MACD Indicator
The goal of technical analysis is to identify any potential buy or sell signals as early as possible. To that end, the MACD indicator, although complicated, is designed to provide traders with insight into a security’s pricing action. Its primary purpose is to predict potential bullish or bearish activity in the stock market.
The signal line, which tracks the MACD line, helps define both the bullish and bearish aspects of the MACD indicator. By combining the moving averages with the signal line, the indicator is able to generate buying and selling signals, which traders can use to their advantage.
Moving Averages and Crossovers
The main role of the MACD indicator is to detect shifts in price momentum as well as changes in the trend of the security being examined. Upon identifying such shifts, bullish and bearish crossovers can be used to identify potential trading signals.
A bullish crossover occurs when the MACD line crosses above the signal line, indicating that short-term momentum is strengthening relative to the longer-term trend. Traders treat it as a potential buy signal. Conversely, a bearish crossover occurs when the MACD line crosses below the signal line, indicating a potential selling opportunity or bearish move.
Divergence and Overbought/Oversold
In addition to helping traders identify crossovers, the MACD indicator can be used to spot divergence trends. Divergence is an important concept in technical analysis, using the historic performance of a security to predict future market activity. If a security is overbought, investors should expect the price to change course soon. On the other hand, if the security is oversold, the price should start increasing at some point.
If price makes a higher high while the MACD makes a lower high (bearish divergence), upward momentum is fading and the uptrend may weaken. If price makes a lower low while the MACD makes a higher low (bullish divergence), downward momentum is fading and the downtrend may weaken.
The Benefits of The MACD Indicator
MACD combines trend and momentum in one indicator, which makes it useful for timing entries and exits alongside other analysis.
The MACD indicator can even give traders an indication of the trend reversal. A shrinking histogram shows momentum fading, which can precede a trend change. This can give investors added confidence when entering a trade, as they have additional information about the market’s next potential move.
How MarketXLS Can Help
MarketXLS returns MACD and related indicators as Excel formulas, for example =MACD("AAPL"), =RSI("AAPL"), and =ExponentialMovingAverage("AAPL", 26), so you can track MACD signals across a watchlist and combine them with other indicators. See technical indicators in Excel.
Ready-made workbooks are in MarketXLS templates.
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