What is MACD?
MACD stands for Moving Average Divergence Convergence, a technical indicator created in 1979 by Gerard Appel for trend-following purposes.
- MACD is obtained by taking the difference between MME 12 and MME 26.
- The signal line represents an exponential moving average 9
How to use the MACD to invest in the stock market?
Let’s take a look at the various possible uses for the MACD, its signal line and the neutrality zone. In the example, the indicator’s default setting is 12.26.9.
Below you’ll find the chart, which you can click on to enlarge along with the explanations on how to use the MACD.
- In 1, we have a white line representing a link in the MACD histograms. Depending on the platform, you may or may not have this line.
- In 2, the yellow line represents the signal line.
- In 3, this is the MACD histogram. Depending on the model and platform, it may or may not be there; this histogram is blue when the MACD is higher than the previous one, i.e. bullish.
- In 4, the MACD histogram is bearish.
- In 5, it’s the neutrality zone at zero.
Using the MACD to invest in the stock market
To interpret the indicator, we’re going to combine the various points discussed above. This is by no means a 100% trading strategy, but can complement your analysis.
- In 1, 3 and 4, we can be attentive to change, preferring to be in the general trend, so when we’re below the zero line, it’s better to take signals only when the MACD changes from blue to red.
- In 2, when the MACD crosses its signal line, we follow the trend in relation to the zero line. For histogram changes, you may not refer to the zero line, but add whether or not you are above or below the signal line.
- A divergence between the MACD and prices is represented by the trend lines. For the more aggressive, you can enter at the histogram change; for greater safety, at the signal line crossing, you can wait for the neutrality zone to be crossed; in this case, it’s preferable to wait for a pullback to this zone to confirm the trend change.
I hope these explanations will help you learn how to use the MACD to invest in the stock market.
Happy trading!
Joseph Pergnan
