Moving Average Convergence Divergence (MACD)

MACD (Moving Average Convergence Divergence) is a trend-following momentum indicator that shows the relationship between two exponential moving averages (EMAs) of a security's price.

MACD Components:

1. MACD Line: 12-period EMA - 26-period EMA
2. Signal Line: 9-period EMA of the MACD Line
3. Histogram: MACD Line - Signal Line (shows momentum)

Trading Signals:

1. Crossovers:

• Bullish: MACD crosses above Signal Line → Buy signal
• Bearish: MACD crosses below Signal Line → Sell signal

2. Zero Line Crossovers:

• MACD above zero → Bullish momentum
• MACD below zero → Bearish momentum

3. Divergences:

• Bullish Divergence: Price makes lower low, MACD makes higher low
• Bearish Divergence: Price makes higher high, MACD makes lower high

Strengths:

• Combines trend and momentum analysis
• Visually easy to interpret
• Works well in trending markets

Limitations:

• Lagging indicator (based on historical data)
• Can give false signals in ranging markets
• Whipsaws during sideways price action