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    Moving Average Convergence Divergence

    Uploaded by

    Nikita Dubey
    MACD is a momentum indicator that shows the relationship between two moving averages of a security's price - the 12-day and 26-day exponential moving averages. It is calculated as the difference between these two averages. Traders may buy when the MACD crosses above its signal line and sell when it crosses below. The MACD can be classified as a percentage price oscillator or absolute price oscillator. While it helps identify trends and momentum shifts, limitations include that it can produce false positives by signaling reversals that do not occur, especially during sideways price movements.

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    Moving Average Convergence Divergence

    Uploaded by

    Nikita Dubey
    84 views3 pages
    MACD is a momentum indicator that shows the relationship between two moving averages of a security's price - the 12-day and 26-day exponential moving averages. It is calculated as the difference between these two averages. Traders may buy when the MACD crosses above its signal line and sell when it crosses below. The MACD can be classified as a percentage price oscillator or absolute price oscillator. While it helps identify trends and momentum shifts, limitations include that it can produce false positives by signaling reversals that do not occur, especially during sideways price movements.

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    MACD is a momentum indicator that shows the relationship between two moving averages of a security's price - the 12-day and 26-day exponential moving averages. It is calculated as the difference between these two averages. Traders may buy when the MACD crosses above its signal line and sell when it crosses below. The MACD can be classified as a percentage price oscillator or absolute price oscillator. While it helps identify trends and momentum shifts, limitations include that it can produce false positives by signaling reversals that do not occur, especially during sideways price movements.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    84 views3 pages

    Moving Average Convergence Divergence

    Uploaded by

    Nikita Dubey
    MACD is a momentum indicator that shows the relationship between two moving averages of a security's price - the 12-day and 26-day exponential moving averages. It is calculated as the difference between these two averages. Traders may buy when the MACD crosses above its signal line and sell when it crosses below. The MACD can be classified as a percentage price oscillator or absolute price oscillator. While it helps identify trends and momentum shifts, limitations include that it can produce false positives by signaling reversals that do not occur, especially during sideways price movements.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    MACD: Meaning, Working, Classification,

    and Limitations
    Put most of your emotional energy into the creation of your indicators, rather than
    trying to guess the market, and you'll probably come out ahead.

    ~Gerald Appel
    Invented by Gerald Appel in 1977, MACD is one of the most popular indicators used in
    analysis of stock prices. The analysis is made using time frames for diverse sets of
    parameters chosen by the user. It is one of the few indicators that are easy to understand
    and interpret, and are reasonably simple to maintain.

    Meaning of MACD

    MACD is short for Moving Average Convergence/Divergence. It is a momentum


    indicator that shows the relationship between two moving averages of a security’s price
    and this trend is said to be Moving Average Convergence Divergence (MACD). When
    the MACD crosses above its signal line Traders may buy the security and when the
    MACD crosses below its signal line Traders may sell the security. More common
    methods such as Crossovers , Divergences and Rapid rises/falls are several ways Moving
    Average Convergence Divergence (MACD) indicators can be interpreted.

    Classification

    The Moving Average Convergence/Divergence can be classified into a Percentage Price


    Oscillator (PPO) and an Absolute Price Oscillator (APO)

    Percentage Price Oscillator (PPO) deals with the computation of the difference
    between two moving averages of price divided by the longer moving average value

    Absolute Price Oscillator (APO) deals with the actual price of moving averages
    rather than percentages changes.
    The Formula for Moving Average Convergence/Divergence

    MACD can be calculated by the difference of 12-day EMA and 26-day EMA i.e.

    MACD = 12-Period EMA – 26-Period EMA

    A type of Moving Average (MA) known as Exponential Moving Average (EMA) places a
    greater weight and significance on the most recent data points and also referred as
    Exponential Weighted Moving Average which reacts more significantly than Simple
    Moving Average (SMA) to recent price changes applying equal weightage to all
    observation in the period.

    How To Analysis MACD

    Whenever the 12-period EMA is above the 26-period EMA the MACD has the positive
    value and when the 26-period EMA is above the 12-period EMA the MACD has the
    negative value. The indication that the distance between the two Exponential Moving
    Averages is growing is when the more distant the MACD is above or below its baseline.

    MACD can be displayed with a graph of distance between the MACD and its signal line
    which is done by a histogram. The Histogram will be above the MACD’s baseline , If the
    MACD is above the signal line and it will be below the MACD’s baseline , If the Moving
    Average Convergence Divergence is below its signal line. For identification of when
    bullish or bearish momentum is high, Traders use the MACD’s histogram.

    Limitations of MACD

    The possible problem with divergence detected is that is can produce a false positive i.e.
    it can sometimes detect reversal when it doesn't take place. On a clear note when the
    price of an asset moves sideways like as in triangle pattern following a trend or range
    “False Positive” divergence occurs. The MACD is pulled away from its prior extremes
    and attract towards the zero lines even in the absence of a true reversal when there is
    slow down in the momentum – slow trending movement or sideways movement of the
    price. Also divergence predicts not enough real price reversal and too many reversals
    that don’t occur.

    The MACD indicator helps traders to easily and quickly identify short term direction of
    trends. It also minimizes the subjectivity in trading through clear Transaction signals.
    This relatively simpler indicator can be readily incorporated to a short term trading
    plan.

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