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Why is MACD Indicator Important to Understand the Stock Markets?

  • July 2014
  • Posted By Ninoslav
  • 0 Comments

MACD indicator is an abbreviated form of Moving Average Convergence Divergence indicator. It is a great technical tool that is used in stock markets to confirm buy and sell signals. You can use it to for online options trading. This indicator shows the relationship between two moving price averages. It’s basic principle works on subtracting 26-day exponential moving average or EMA from 12-day EMA. 9-day EMA is then plotted on top of MACD line. This EMA is known as the signal line. This signal line is used as a trigger for buy and sell signals.

However, there are several methods to interpret MACD. A few common methods are:

  1. Crossovers- When the signal line rises above MACD, then it indicates the bright of selling stocks. Conversely, when any signal line falls below MACD, then it indicates the upward momentum of the price of that asset.
  2. Dramatic rise- When there is a dramatic rise in MACD, it indicates that the security is overbought and will soon be normalized.
  3. Divergence- It indicates the end of running trend. This is when MACD diverges from security price.

The shortcomings of the MACD indicators
The MACD indicator, like many other forecasting algorithms, can generate false signals. These signals can mislead you. For example, a false positive would be a bullish crossover followed by a sudden stock decline.

A false negative would have no bullish crossover, but stock suddenly accelerates upwards. Therefore, you can avoid this ambiguity, but adding a filter to signals line crossovers. Trade analysts use various filters to eliminate false signals, confirming true ones.

However, to compare the profit and loss in the stock business, you can read “How to gauge your profit and loss by the RSI indicator?”

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