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FINANCIAL CHRONICLE™ » CHRONICLE™ ANALYTICS » Moving Average Convergence/Divergence Indicator

Moving Average Convergence/Divergence Indicator

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Quibit


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
[You must be registered and logged in to see this image.]
Commonly known as MACD, is an indicator that signals trend movements. This is a lagging indicator and can be used with other charts and patterns as a conformational tool. The MACD line is arrived at by subtracting a 26 day moving average from a 12 day moving average. A 9 day moving average of the difference between the 26 and 12 day moving averages is drawn as the signal line. This is the most common period used by analysts but other time periods could also be used.

BUY/SELL signal

The MACD is supposed to give BUY or SELL signals in three ways. The signals are given with crossovers of MACD and the signal line, divergences of MACD from the security price line and with sharp rises of the MACD line.

Crossovers of MACD and the signal line are easy to spot and interpret. When the MACD line falls below the signal line, it is considered to be a SELL signal. And if the MACD rises above the signal line it is a BUY signal. Let's look at this graphically.

[You must be registered and logged in to see this image.]

The dotted line is the signal line whereas the solid line is the MACD. You will observe that after the MACD crosses the signal line from above to below it is a SELL signal and the accompanying stock chart confirms the downward trend. However, you will also observe that the signal is given after the stock has started its downward trend. But it can be used as a tool to confirm the stock's downward trend.

A problem arises when the stock is moving sideways (that is to say the prices are moving up and down without an identifiable trend), there will be many crossovers and you simply cannot buy and sell at all these signal points. In such an instance the signals will have to be used in conjunction with other formations as well.

Another signal is given when the MACD diverges from the security's prices. That is when the MACD and the security price line moves in opposite directions. When this happens it is signals that the current trend is over and you should structure your BUY or SELL decision accordingly.

You would remember from our earlier discussions that a downtrend is confirmed with successive lower highs and lower lows. If you see the graph below the price line confirms the downtrend with a lower low. However, the MACD line shows less downside momentum with a higher low. This is considered to be a sign of the reversal in the current downtrend.

[You must be registered and logged in to see this image.]

The above chart depicts a bullish divergence which signals a reversal in the current downtrend.

The other signal is given when the MACD rises dramatically and is a signal that the security is overbought and will soon return to its normal levels. As the chart below shows the MACD rises significantly which could mean that the security is oversold. This sharp increase is followed by an equally sharp decline which brings the price back to normal levels.

[You must be registered and logged in to see this image.]

As a closing comment we would remind you to use this indicator with other techniques before taking the final BUY or SELL decision.

Sri Lanka Equity Analytics
www.srilankaequity.com

JennyFunny


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
Thanks great stuff..

npc86

npc86
Manager - Equity Analytics
Manager - Equity Analytics
Hi Quibit,

This was a very valuable for me .
Thanks a lot.
And Please look at this link and tell me how it happen. MACD is below but price moving up...?
confused confused
[You must be registered and logged in to see this image.]

And here
[You must be registered and logged in to see this image.]

what can we predict about the share price (buy/sell) for this kind of MACD pattern...?
Thanks in advance...!
Smile

npc86

npc86
Manager - Equity Analytics
Manager - Equity Analytics
@Quibit wrote:
[You must be registered and logged in to see this image.]

And How did you set above green/Red Arrows at crossing points.
(I need to know about the technical option I should follow to set as above in my online trading charts...?
Thanks Smile

pushpakumara


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
Just to get an idea ,what is the ideal time period (eg. 2 years, 1 year, 6 months , 3 months etc.) that one need to take into consideration when you do a moving average analysis?


.

JennyFunny


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
i prefer..shorter time periods..however thats me..

Quibit


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
Technical sector moderator is Gann, I am sure he will be able to help you with most of these question. I am an ameature compared to his knowledge.

gann

gann
Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
@npc86 wrote:

And How did you set above green/Red Arrows at crossing points.
(I need to know about the technical option I should follow to set as above in my online trading charts...?
Thanks Smile

You could add the macd strategy if you are using directfn. Macd strategy in Directfn marks the signal line cross overs automatically.
To add
Strategies-> Macd

gann

gann
Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
@npc86 wrote:
what can we predict about the share price (buy/sell) for this kind of MACD pattern...?
Thanks in advance...!
Smile

Technical indicators of these sorts are useful if you are developing a trading strategy. You come up with a trading strategy by putting together one or more indicators. A strategy is set of simple rules that creates buy and sell signals based on values of the chosen set of indicators. Back test it to check the past profitability. After you have fine tuned your strategy, you could put it to action and follow the strategy. That way you are keeping your emotions affecting your trading by following predefined set of rules.

Buy/Sell signals of these indicators are effective only when the stock is trending. (not when trading in a tight range). SO before you take measurements of these indicators look at the chart and see if the price is moving diagonally, ie from the bottom left to top right of the screen or top left to bottom right Smile

JennyFunny


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
Thanks gann great information..

happy trading

npc86

npc86
Manager - Equity Analytics
Manager - Equity Analytics
@gann wrote:
@npc86 wrote:
what can we predict about the share price (buy/sell) for this kind of MACD pattern...?
Thanks in advance...!
Smile

Technical indicators of these sorts are useful if you are developing a trading strategy. You come up with a trading strategy by putting together one or more indicators. A strategy is set of simple rules that creates buy and sell signals based on values of the chosen set of indicators. Back test it to check the past profitability. After you have fine tuned your strategy, you could put it to action and follow the strategy. That way you are keeping your emotions affecting your trading by following predefined set of rules.

Buy/Sell signals of these indicators are effective only when the stock is trending. (not when trading in a tight range). SO before you take measurements of these indicators look at the chart and see if the price is moving diagonally, ie from the bottom left to top right of the screen or top left to bottom right Smile

Thanks gann..!
can you send some of link/material which we can study it in details....?
Smile

chamith

chamith
Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
there you go mate;
https://www.youtube.com/watch?v=2kYhOxyGDdg&feature=related

npc86

npc86
Manager - Equity Analytics
Manager - Equity Analytics
@chamith wrote:there you go mate;
https://www.youtube.com/watch?v=2kYhOxyGDdg&feature=related

Thanks Chamith... Smile

vicorka


Stock Trader
MACD is good, but you may want to readjust your settings in periods of different volatility.

http://www.marketvolume.com/

hasintha

hasintha
Senior Equity Analytic
Senior Equity Analytic
Divergence in NTB

[You must be registered and logged in to see this image.]

http://hasi-journal.blogspot.com

K.Haputantri

K.Haputantri
Co-Admin
?Can an expert intepret this NTB chart.

Jeremy

Jeremy
Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
Good one from the previous administrator Qubit..

SHARK aka TAH

SHARK aka TAH
Expert
Expert
@hasintha wrote:Divergence in NTB

[You must be registered and logged in to see this image.]
proper divergence should be the price of share falls below last low and whereas MACD does not fall below its low  Very Happy 

if you look at LFIN you will see the difference..... Rolling Eyes 

jehovah

jehovah
Equity Analytic
Equity Analytic
lol!

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