MACD: Moving Average convergence Divergence
- June 5, 2019
- Posted by: PurpleTrades
- Category: Stock Market
MACD is one of the most famous indicators used for intraday trading and Positional trading.
Developed by Gerald Appel in late seventies. This is a step ahead of Exponential moving average.
MACD has four basic components:
Zero line, Histogram, Signal Line, MACD line.
On the chart it looks like this:
Zero lines: It is a Horizontal line on which Histogram are plotted. It is basically a reference line for MACD.
Histogram: This is basically the difference between the signal line and MACD line plotted on zero lines.
Higher the difference between Signal line and MACD line, Higher the histogram Bar size.
If MACD line crosses above the signal line (towards up) the Histogram will be plotted above zero lines in the positive zone.
If MACD line crosses below signal line 9towards down) the Histogram will be plotted below zero lines in negative Zone.
MACD Line: It is made up of the difference between 12 and 26 Day EMA. As the difference increases MACD also moves accordingly up/down from Zero line.
When 12D EMA touches 26D EMA i.e the difference between 12 EMA and 26EMA is Zero, MACD will be exactly at Zero line indicating Zero difference.
If 12D EMA crosses above 26 EMA (towards up) MACD line will also go above zero lines, Higher the difference between 12EMA and 26EMA. Higher the difference between Zero line and MACD line.
Similarly, if 12D EMA crosses below 26EMA (towards down) MACD line will also go below the zero lines.
As shown in the figure :
Signal Line: Signal Line is Just 9D EMA of MACD line.
So As MACD lines go up or down, Signal line also moves along and gives crossover generating Buy and Sell Signal.
Working of MACD System :
The working mechanism of this system is almost same as of EMA.
If MACD line cross signal line towards upside it is a BUY Signal.
If MACD line cross signal line towards the downside, it is a SELL Signal.
To learn more visit: learn intraday trading
Need more clarifications? Watch this video: