This article will explain what the MACD indicator is, as well as outlining how it can be read and interpreted on charts, how it is calculated, which settings are typically used for it, how it can be useful for trading within the stock markets, and important points to keep in mind when using it.
What is the MACD Indicator?
The MACD (Moving Average Convergence Divergence) trading indicator is a highly popular, technical analysis tool used by professional traders.
The MACD indicator is also part of a range of technical analysis indicators known as 'momentum oscillators', which are designed to track high and low movements between two extreme values, and this information is then used to create a trend indicator that will fluctuate between these two extreme regions.
The MACD indicator measures the features of a trend, such as the direction of a trend (moving in a bullish or bearish direction), the amount of the trend (how significant or minor the trend is), and the speed at which it is occurring.
MACD indicators are often used by professional traders for following trends and reviewing potential price reversals (i.e. when the price changes direction and goes from bearish to bullish, or vice versa).
Understanding MACD Indicators on Charts
MACD indicators use two different trend lines, and the points at which they cross are typically referred to as 'trading signals', which are regarded as opportune points at which the trader might want to consider buying or selling.
MACD indicators use three different 'series' known as:
- The MACD series: the difference between a longer exponential moving average (EMA) and a shorter EMA
- The average/signal series is the EMA of the MACD series
- The divergence series represents the differences between the MACD series and the average series
Moreover, the difference between the MACD line value in comparison with the signal line is what's known as a 'MACD Histogram'.
The range of different signals that are given out by the MACD indicator are, which we mentioned previously, signals that indicate to traders when they should trade, but ultimately these signals are used to predict the market trends.
Therefore, it's arguably best to use several different indicators at the same time, in order to ensure that signals are more likely to be correct.