Strategy behind using MACD Indicator
If you are a Stock Trader or wanna be stock trader, It is obvious that you had already started learning charts to grasp the share market.
MACD Indicator is also one of the popular chart which is used to plan the strategy for Day trading, week trading or monthly trading. MACD stands for Moving Average Convergence Divergence & this chart was developed by Gerald Appel in 1970. It means this chart is being used by Share market from more than 45 years and you can also plan your strategy by proper using this chart. However, every chart has its own strategy to use, functions, applications as well as its limitations. Let’s see how we can use the MACD Indicator for planning strategy in share market and make money.
What is MACD Indicator
MACD Indicator is the indicator which shows the relation between two different moving average prices and the signal of current trend.
How to calculate MACD
Most of the Share Market Exchanges provide you insight to the MACD. As I do use Zerodha for trading, here I dont have to calculate MACD individually, I have to just go to chart and select MACD from the study option. Anyway, leave that I will let you know how you can calculate MACD indicator.
MACD indicator is formed by 2 lines, one is fast line and other is slow line ( also 9n as signal line).
- Calculate a 12 period exponential moving average of the close price.
- Calculate a 26 period exponential moving average of the close price.
- Subtract 26 EMA from 12 EMA, you will get fast line of MACD Indicator.
- Calculate a 9 period exponential moving average of fast MACD line which you get above & this line will be considered as the slow or signal MACD line.
How to use MACD indicator for planning trading strategy
- ZERO line Crossovers
Fast line will move near 0 when 12 day EMA if about to cross 26 day EMA. When MACD line crossed zero line from the below, it means uptrend is going to start. While, if MACD line crosses zero line from above, it means downtrend is going to start.
- Signal Line crossovers:
You can check signal line to confirm timing of the trend. If MACD line is crossing above Signal line, Buy signal has been occurred. While, if MACD line is crossing below the signal line; Sell signal has been occurred.
If Price is making new highs and MACD is not following that trend, you can count it as the Bearish divergence and it means reversal of lower price could be occur.
While, If price is making new lows and MACD is not following that trend, you can count it as the bullish Divergence which means selling pressure is getting slow and reversal towards high price could be occur.
Limitations of MACD Indicator:
As we know, it is indicator so It doesn’t provide you stop loss price, entry price or exit price. This is the biggest limitation of this indicator. You have to implement your own strategy to increase your profit or limit your loss.
In short, if MACD is above zero, it is in uptrend and you can also confirm downtrend by looking at charts. Divergence will be shown when momentum is getting slow and it can indicate you when reversal is about to occur.