What is MACD Indicator & how to read it to get buy and sell signals?

In my last post, I discussed about What is Moving Average and how to use it?
.

Today I am going to explain about another lagging but very useful indicator called Moving Average Convergence Divergence or in a short MACD.

Like SMA or EMA, MACD is also a trend-following indicator.

It was invented in 1979 by Gerald Appel.

You can use MACD for intraday trading, options trading, and scalping also.

So, without further delay, let’s learn what the MACD indicator is and when and how to use it in trading.

MACD is the difference between a fast and a slow exponential moving average.

By default 12 and 16-period EMAs are used.

MACD is the difference between the values of these two EMAs.

9-period EMA acts as the signal line.

The difference between MACD and the signal line is calculated and plotted as MACD Histogram.

Here is an example of what MACD looks like.

MACD indicator example

How MACD looks in a Chart

MACD Calculation:

MACD is calculated as-

MACD = EMA(12) – EMA(26).

The Signal Line = EMA(MACD, 9).

Histogram = MACD – Signal Line.

MACD Indicator Buy and Sell Signal:

By using MACD you may enter and exit a trade.

The most common MACD entry and exit signal is MACD crossing over the signal line.

A buy signal is generated when MACD crosses above the signal line(MACD bullish crossover).

MACD buy signal of TataSteel

MACD is giving a buy signal here.

A sell signal is generated when it crosses down (MACD bearish crossover) through the signal line.

MACD Sell Signal of IRCTC

MACD is giving a sell signal

Also, MACD buy and sell signal is generated by MACD divergence (A divergence is if the price and MACD indicator moves in the opposite direction).

Conclusion:

The MACD indicator is a very useful tool to get buy and sell signals in the stock market.

You may add it to your trading system to get more accurate trading signals.

Though nothing is guaranteed in the stock market, the MACD divergence strategy is one of the best strategies out there.

 

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