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Moving Average Convergence/Divergence (MACD) is an oscillator implemented for the technical analysis of price movements. This concept came into existence in the late 1970s when Gerald Appeal established a connection between duration, strength and momentum and how it can be used for determining the upcoming prospects of the market.
MACD evaluates a combination of three time series which are: the average or signal, the divergence and the MACD series (difference in-between a slow exponential moving average (EMA) and a fast EMA. Thus, the indicators of this tool are influenced by the three constants of EMA.
Why Use MACD?
MACD is known for its capability of identifying short-term momentum quickly and thus is one of the finest signals for indicating upcoming trends. The values are illustrated below and above the zero line, ensuring that the oscillator produces clear, actionable and precise signals.
The main function of this tool is to take an account of the divergence that take place on 12-day or 26-day EMA lines. The 26-day is usually subtracted with 12-day, remember this length can be customized as per your trading strategy. Traders even use moving average along with the derived value that creates momentum trend lines along with the signals.
Divergence and crossovers that occur in two lines indicate retracements, reversals and weak momentum. If the moving average (MA) lines are in similar direction, while the short-term MA forms a steeper slope then this means that the present trend is a growing strength or strong.
When standard MA time intervals are implemented, the MACD becomes a short-term tool and the work of EMA is to decrease lag. Large trends that occur in the market can be identified either by incorporating another technical tool or by increasing the time period. This is probably the reason, why MACD is known to be one of the highly trusted technical tools with little or no sort of limitations.
Just like any typical tool, there are cases when MACD might interpret false signals. So, a good trick is to have filters to the signals that the indicator gives to make sure that they help up and do not deviate.
Bottom Line
Moving Average Convergence/Divergence Oscillator is a valuable technical indicator that not only helps in exploring the trends but at the same time it measures the momentum of that signal. The versatility of this tool makes it a common choice amongst the analysts and traders who are part of the finance spectrum.
