Technical Indicator – Moving Average Convergence Divergence

Technical Indicator – Moving Average Convergence Divergence


Technical analysis lets you make use of many technical indicators that lets you understand what the price is doing and take a less biased trade. The technical indicators should be used along with the price to judge about what position one should take in the market. Take care to understand that it needs to be used only to give added confirmation.

The trader looks at the Moving Average Convergence Divergence or MACD which is made up of the exponential moving averages. This is plotted using two exponential moving averages. This is the 12 day and the 9 days EMA. The fast-moving EMA is the signal line and this reacts much faster to the movements in price. TheMACD is plotted on a histogram and this lets you read when the momentum in the market is negative or positive. In most software the red line is used to denotes the slow EMA and the blue line denotes the fast EMA. The future traders look for a crossover of the blue line over the red line. This is where they buy the asset. When the blue line crosses the red line on the downside then it is a sell signal.


MACD histogram

The future traders also look at the MACD histogram. Here if the histogram falls below the central indicator then this means that the trend is turning bearish and one should look to short the market. When the center of the indicator rises above the histogram then this is a bullish indicator and one should go long in the asset.

Thehigherprobabilitytrades are when you see a bullish signal in the MACDhistogramand also see that the upward EMAcrossover has taken place. Similarly, you see a bearish indication when you see that the histogram gives a sell indication and the faster EMAcrosses the slow EMA on the downside.

Trading using technical indicators

It may look very easy to trade using the technical indicators. This is because many feel that they give sure short signals. Like when trading with RSI one should sell when the value rises over 70 or buy when the value falls to 30. Similarly in trading with MACD one should buy when the crossover of the EMA takes place. When in the outside one needs to buy and on the downside, one needs to sell. However, if traders just look at these indicators and trade then in most cases they will end up in a loss. This is because one also needs to understand the price movement and trade the demand and support along with these technical indicators. Check out the source here.