Moving average convergence divergence (MACD) oscillator is one of the most popular technical indicators. Having features such as leading and lagging indicators, with moving average signal line, and MACD presented this flexibility and versatility of traders covet.
Perhaps more important, trend-following and momentum-forecasting abilities MACD not get bogged down in extreme complexity. This makes it accessible for both beginners and experienced traders and facilitates their interpretation and confirmation. For this reason, many consider it one of the most effective and reliable technical means.
Although it is not useful for intraday trading, the MACD indicator can be used for daily, weekly or monthly price charts. The basic MACD trading strategy consists of two moving-average system—one 12-period and 26 one-period—nine-day exponential moving average (EMA), which is designed to create clear signals. The interaction of two moving average lines, its nine-day EMA and the main effect of price is the basis for MACD interpretation.
That the MACD indicator can be used to
Traders can use the MACD crossing the signal line when the nine-day EMA crosses the two moving average lines. Additional signals are generated when two moving average line crosses above or below the zero line by the oscillator. You can determine the divergence between the MACD lines and the price action on the chart, highlighting a weak trend and possible reversals.
Understand that no technical tool can predict with confidence. No trading system can guarantee profit or eliminate risk. The MACD has a lot of strengths, but it is not infallible and control, especially in sideways markets. Since MACD is based on underlying price points, overbought and oversold is not as effective as in the pure volume-based oscillator. Always use other technical tools to confirm the signals offered by the MACD indicator, namely the ability to work in conjunction with many other tools that gives the MACD indicator its reliability.
(For associated reading, see: identifying trend reversals with MACD.)