The Moving Average Convergence/Divergence (MACD) indicator is like a cool tool that helps traders figure out if a trend is happening. It's not really used to tell if something is too expensive or too cheap. When you look at it on a chart, it's like two lines that go up and down without any limits. When these lines cross each other, it's like a signal that tells you when to trade, kind of like when you use two moving averages together.
How this indicator works
1. Hey there! So, when the MACD (which stands for Moving Average Convergence Divergence) goes above zero, it's a good sign for the stock market. We call it bullish because it means the prices might go up. But when it goes below zero, it's not so great. We call it bearish because it means the prices might go down. Also, when the MACD goes up from below zero, it's another good sign. But when it goes down from above zero, it's not so good.
2. Okay, listen up! When the MACD line goes from below to above the signal line, it's a good sign for the stock market. We say it's bullish because it means the prices might go up. And guess what? The lower the MACD line is below the zero line, the stronger the signal is!
3. Now, pay attention! When the MACD line goes from above to below the signal line, it's not a good sign for the stock market. We say it's bearish because it means the prices might go down. And guess what again? The higher the MACD line is above the zero line, the stronger the signal is!
4. Alright, let's talk about trading ranges. Sometimes, the MACD gets a little crazy and starts crossing back and forth across the signal line. We call this whipsaw. It happens when the stock market is not really going up or down. People who use the MACD usually try to avoid trading during this time or close their positions to make things less risky.
5. Last but not least, let's talk about divergence. When the MACD and the price action don't agree with each other, it's a stronger signal. For example, if the MACD says the prices will go up, but the actual prices go down, it's a sign that something might be off. So, when this happens, it confirms the crossover signals and gives us a better idea of what might happen in the stock market.
Calculation
So, there's this thing called MACD that we can calculate. It's not exact, but it's close enough. We start by taking two numbers called EMAs. One is for 26 periods and the other is for 12 periods. We subtract the bigger one from the smaller one. These EMAs are always getting closer and farther apart from each other. This makes the MACD go up and down around zero. To make things even more interesting, we create a signal line using a 9 period EMA of the MACD line. Oh, and by the way, you can change the numbers if you want to.