Moving Average Convergence Divergence (MACD) is a frequently used momentum indicator composed of several moving average lines. A MACD line is plotted by using the exponential moving average (EMA) over 12-day periods and subtracting the EMA of 26-day periods.
A “signal line” – the 9-day EMA – is then plotted on top of the MACD line. A histogram is also usually included to indicate the divergence between the signal line and the MACD. When the MACD and the signal line cross paths, these points of convergence are widely used as trading indicators that trends are starting or ending.
Traders must make decisions about how many crossovers are indicative of the conditions that he or she is looking for. In indicators such as the MACD, crossovers of moving average lines are extremely relevant and are accompanied by histograms that show the distance between the moving average lines.
One such chart pattern is called the Death Cross: a chart pattern indicating when a security’s short-term moving average crosses underneath its long-term counterpart, typically followed by an increase in trading volume. Investors use a death cross, the inverse of a golden cross, as a tool to identify incoming bear markets, most commonly using long-term 50-day and 200-day moving averages to detect the pattern.
When the histogram (grey bars in the chart) are positive and rising, it could be a bullish indicator that the security has positive momentum and is heading higher. Traders may consider taking a long position in the security or exploring call options. Conversely, if the histogram turns negative and continues to produce negative values, it could be a bearish indicator of a potential downward trend. In that case, a trader might consider selling the security, exploring put options, or shorting the security.
The variables (time spans) of the lines can be switched up for different purposes or to double-check the signal; a short-term example would be 5-day, 35-day, 5-day.
MACDs are not perfect. Some divergences can signal false positives, marked by potential reversals that do not happen; others can miss potential reversals.
Analysts spend enormous amounts of energy and attention to calculate and analyze moving averages in relation to one another. With Tickeron, algorithms can do much of this work for you. Our artificial intelligence tools are capable of conducting analysis to more quickly and efficiently generate trade ideas, analyze signals to execute advantageous trades, or in other ways that support rational, effective trading decisions.
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