In previous articles, I have mentioned how I used about 80% technical analysis to get into trades. All of this analysis simply revolves around price. In other lessons we have gone over Bollinger Bands, EMA, SMA, head and shoulders patterns, and wedge patterns. In today’s article, I’m going to be introducing a new study known as MACD or MacDiesel, as I like to call it.
What is MACD?
I nicknamed this study MacDiesel because it is a very powerful tool to help you identify price trends. MACD stands for Moving Average Convergence-Divergence and it is a trend following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the signal line, is then plotted on top of the MACD. This signal line functions as a trigger for when to buy or sell.
Blue= MACD Red=Signal Line
Bullish vs. Bearish Indicators
When the MACD line crosses above the signal line it is said to be bullish and we can expect an upward movement in price.
When the MACD line crosses below the signal line it is said to be bearish and we can expect a downward movement in price.
When the MACD rises dramatically (the shorter moving average pulls away from the longer-term moving average) it is a signal that the security is overbought and will soon return to normal levels. The inverse is true when the MACD falls dramatically.
Using MACD Wisely
MacDiesel is definitely a powerful trend indicator in the price of the stock but you have to keep in mind that these are going to be very SHORT-TERM trends. If you were going to execute a trade off of a MACD indicator, then you would want it to be a swing-trade, exiting within a week or less in most cases.
To maximize the success rate of the MACD indicator, always pair it with a volume indicator. If a stock has above average volume when the MACD crossover takes place, then you are much more likely to see a great price increase in the stock.
I have mentioned this before but studies like MACD are not always going to be 100% accurate. They are merely tools that can help you get into and out of a trade. Using a combination of different studies is always best to maximize you success rate.
Adding MACD to you Charts
Adding MACD to your charts should be very simple with whatever trading platform you are using. I’m going to show you how to add MACD with Schwab’s Streetsmart edge so you get a better idea.
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Homework: Go on your trading platform and see how you can add MACD to your charts. Look through multiple charts and see if you can find a recent cross of the MACD over the signal line.