Question

Message Header Anal... Explain the math behind MACD and how to use it.

Answer 1

MACD = Moving Average Convergence Divergence

MACD is a trend indicator of stock prices, this is mostly used by Technical Analysts to identify the momentum and direction of the prices. It is calculated from historical closing prices.

This indicator shows the relationship between two moving averages of a stock's price and is calculated by subtracting 26 period exponential moving average from 12 period exponential moving average. This math leads to the MACD line. Then a 9-day exponential moving average of MACD is calculated and is plotted on top of MACD line. This is called the signal line.

A buy call is generated when the MACD crosses above its signal line and a sell call is generated when the MACD falls below its signal line.

MACD is displayed with the help of a histogram. The histogram shows the gap between MACD line and signal line. When the MACD line is above its signal line, then histogram will be above the macd base and vice versa.

Rapid Rise or Rapid fall of a stock :

when the MACD rises or falls rapidly, then it signals that the stock is overbought or oversold respectively. But this conclusion is derived after also have a look at the RSI indicators.

Divergence:

When a high or low diverges from the corresponding highs and lows, this state is called divergence. For example, Divergence is bullish when the MACD forms two rising lows that correspond with two falling lows on stock's price then it is a bullish sign suggesting a buy on stock.

Crossover:

As name suggests, when the MACD line falls below the signal line it is a bearish sign and vice versa.