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MACD Indicator Strategy

The MACD Indicator Strategy is a momentum oscillator used to trade trends. MACD Trading Strategy act as an oscillator and are not used to identify overbought conditions. They appear on the chart as two lines that oscillate without boundaries. The crossover of two lines gives the trading signals in the moving average system. It is developed by Gerald Appeal towards the end of 1970. We understand the momentum and directional strength by calculating the difference between time period intervals. They use two separate time intervals and a momentum oscillator line is arrived by taking the difference of moving averages.

MACD Indicator Limitations

The best way to assess the oversold nature of a stock is by looking at technical indicators like the relative strength index. Each of the three candlesticks patterns should be close to the low price for a period. They should mark a steady decline in price and have a lower shadow. Each candlestick should open within the real body. When patterns appear at uptrend it will indicate a weakening of trend and reversal. Three crowns are used by stock market analysts to describe the status of the market downturn. They will unfold three sessions and consist of three long candlesticks that trend downward. The three crows will help to confirm that a bull market that will end and market sentiment turns negative. This candlestick pattern has three soldiers in attributes that help to identify a bullish reversal. These will take the shape of consecutive red candles.

How to use macd effectively

The macd will measure the momentum strength by using the macd line and zero lines as reference points. So when the macd line crosses above the zero lines the signals are uptrend. When the macd line crosses below zero lines the signal is a downtrend. In trading, we use two moving average at different speeds. As one will be quicker to react price movement than the slow one. The new trend occurs at a fast line which reacts first and crosses the slow line. The fast line starts to move from the slow line as a new trend is formed.

Formula for MACD

\text{MACD}=\text{12-Peroid EMA}-\text {26-PeroidEMA} MACD=12-Peroid EMA-26-Peroid EMA.

Limitations of MACD Indicator

Here the problem with divergence is that it can be a signal reversal with a false-positive signal. The divergence doesn’t forecast all reversals. They predict reversals that don't occur.

MACD Indicator Strategy Example

We take the 12day and 26day exponential moving average of closing prices security. So to calculate the exponential average of closing prices you have to take the weighted calculation of moving averages. The weighing multiplier needs to be calculated. Then both the EMA data difference is taken and draws a MACD line for the said duration. The area is below the time axis and is divided by the 0 axes to show negative and positive. Then nine-day EMA is calculated for MACD data with the same method called the signal line. Then a bar graph is drawn in the same area where the bar length shows movement variation in the MACD line and signal line at a single point. The indicator is used when there is a proper trend. There are long bars in a histogram that show divergence while short bars show convergence.

Summary

MACD is unique as it serves as an oscillator crossover indicator. It is a dual purpose that gives two signals in one indicator allowing a less clutter chart. The strategy is useful for traders for understanding the MACD worthwhile. The indicator used is advantageous in increasing the odds that trade will prove profitable.