Technical Indicators 101 (MACD)

by 9 Jul, 2020

Technical Indicators 101 (MACD)

Disclaimer: I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand! 

Moving Average Convergence Divergence is a technical indicator that shows momentum. It does this by taking the difference between a 26 period exponential moving average and a 12 period exponential moving average. An exponential moving average is a moving average that places a larger weight on more recent results than on past results. This is in contrast to a typical simple moving average (SMA) where each data point is weighted equally in the average. On Invstr the MACD is a line showing the difference between the two moving averages, using other platforms you may see the two moving averages separately. 

With the format on Invstr, a positive MACD is seen as bullish and a negative MACD is seen as bearish. The speed at which the MACD is increasing or decreasing can also provide insight into the momentum of a stock. For example, if the MACD is positive but is quickly approaching zero, this is likely not very bullish. Another signal traders often employ is when the MACD crosses zero. At this point there is usually an trend starting in a stock, so this is considered a signal. 

Combining the MACD with other technical indicators can be extremely powerful, and can give you a better technical understanding of a stock. I personally use the MACD and RSI together often. Specifically, I check the RSI to determine if the stock is either overbought, oversold, or in an up-trend or down-trend. Looking at the MACD as well can assist with confirming a trend or signal from the RSI. For example one major limitation of the RSI is that stocks can stay at levels that are considered overbought or oversold for a considerable amount of time, if there is strong enough momentum. The MACD can help mitigate this weakness. Let’s say a stock has an RSI of under 30 for a long time, but the MACD is negative yet it shows, increasing negative momentum, it is likely better to wait on acting on this RSI signal.

I hope you enjoyed and will use Moving Average Convergence Divergence on Invstr! Just go to any stock’s chart and click “technicals”. If you use the MACD in your analysis tag me in a post with your chart. Follow me on Invstr @robbieb for more market news and analysis. 

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