Moving Average Convergence Divergence
Some of the disadvantages of moving averages can be avoided by using theMoving Average Convergence Divergence (MACD). MACD is the difference between the fast 12-day exponential moving average (fast EMA) and the slow 26-day exponential moving average (slow EMA). Typically, this is plotted with the 9-day EMA of the indicator itself.
SIGNAL = EMA(9) [MACD],
where
- MACD = EMA(12) [p] - EMA(26) [p];
- p – price.
Bullish divergence occurs when a new high is not confirmed by a new high of the MACD. It may indicate that the prevailing bullish trend is weak and about to reverse. However, before opening a position against the trend, check other signals, for example, the breakout of the trend line.
Bearish convergence occurs when a new low is not confirmed by a new low of the MACD. It may indicate that the prevailing bearish trend is weak and reversal may be possible. However it is better not to make a decision based only on this factor and bear in mind that if MACD is close to the zero line this indicates that the prevailing trend is likely to continue.
Trend Indicators: MACD Bearish Convergence
MACD signals:
- If MACD is below the zero line then trend is bearish, if it is above it then the trend is bullish.
- SIGNAL line and price bullish divergence/bearish convergence – a strong sign that the prevailing trend is weak.
- If MACD is below zero and there is no bearish convergence, and MACD histogram crosses the slow line (SIGNAL) from below, then there is a greater chance of an upside price rebound.
- If MACD is above zero and there is no bullish divergence and MACD histogram crosses the slow line (SIGNAL) from above, then there is a greater chance of a downside price rebound.
