The Moving Average Convergence Divergence known as the MACD indicator fluctuates above and below Zero. It highlights the most momentum and trend direction of stocks.
MACD indicator components
represents the heart of the indicator, and by default, it’s the difference between the 12-period EMA and the 26-period EMA. It means that the MACD line is a complete MA crossover system by itself.
The signal line:
it is the 9-period EMA of the moving average convergence divergence
is the difference between the moving average convergence divergence and the signal line.
The best MACD signals
New High/Low of MACD line:
One of the simplest ways to use moving average convergence divergence as a momentum indicator: is to look for a MACD line to make a significant new high or low then enter the pullback following that new momentum extreme. The momentum line represents a piece of visual information in the price bars, but it can be a helpful confirmation in some situations.
MACD line divergence:
. Best pullbacks precede by the MACD fast line create a significant new high or low in a downtrend. It follows logically pullbacks that are not set up by a new high or low. When the market makes a new high in price not followed by a new high on the indicator, and vice versa to the downside. In this case, the momentum divergence would suggest that the dominant group in the market may be losing its power and that a reversal is more likely than a continuation
The overextended MACD line:
A trading strategy that consistently buys at extreme highs and sells at extreme lows is likely to be painful. So, a
simple MACD-based rule can help us avoid many of these situations :
first: Avoid buying when the moving average convergence divergence line extends into highs
second: Avoid selling when it reaches a low are
MACD line hook:
. A turn in the MACD fast line can often be the first indication of emerging momentum, especially when the market is at an inflexion point. The signal is not so effective on lower time frames. While on higher ones, a trader can spot decent swing points on your charts. This signal works best in combination with support and resistance
The slope of a signal line:
At first glance, the slow line appears to have less noise and fewer false moves than the last line, but it is just a reflection of the smoothing of the slow line, which also will miss many signals that appear on the fast line. It is better to be suspicious of trades set up against the slope of the slow signal line if the slow line extends and turns back toward the zero line.
Position of the signal line relative to zero level:
. The only way for the fast line to get far above zero and stay there is to make an extended move to the upside. In this context, the position of the slow line is not very useful. Disagreement between the fast and slow lines highlights or confirm pullbacks in prices.