The moving average convergence divergence (MACD) is a trend following momentum indicator that shows the relationship between two moving averages of a stock price.
We can calculate the MACD by subtracting the exponential moving average of 26 periods from the EMA of 12 periods.
The output of this calculation is called the MACD line.
After this has been calculated, a nine day EMA is placed across the MACD line called the Signal Line.
Some investors choose to buy or sell a stock when the price rises above the signal line or to sell short when the price falls below the signal line.
Below are some of the buy and sell signals. Some were better than others.
Personally, I like the MACD indicator, but I prefer RSI and Accumulation / distribution to MACD.
There are many different interpretations of the MACD indicator and each investor is free to use the instructions on the signal line to make a choice.
Some investors see a problem in evaluating their buying decisions solely with the MACD, as this can often signal a possible reversal in the event of divergence, but then something like this does not happen.
A false positive can often be generated.
Another problem is that divergence cannot predict every reversal. In essence, it predicts too many reversals that will not occur, but real price reversals.
A false positive can occur when the price of an asset moves sideways, e.g. B. in an area or a triangle pattern.
Additionally, a slowdown in trading momentum may cause the MACD to break away from its previous extremes and move towards the zero lines.
The question that often arises is whether MACD is a leading indicator or a lagging indicator.
Answering in simple terms is a lagging indicator.
First and foremost, all data used to calculate the indicator is based on the historical fluctuations in the price of a stock.
Because it is largely based on historical data, it will always lag behind the price.
Even so, some investors use MACD histograms to predict when a change might occur. In this case, it can be classified as a leading indicator as it predicts future trends.
MACD is a trailing indicator. Let us quickly compare leading and trailing indicators.
- A leading indicator is a tool that can be used to predict future movements in a market
- A lag indicator is a tool that gives warnings as soon as the price movement has already started
- Leading indicators are often quick to react to prices, but one short drop is that they tend to send out the wrong signals
- Delay indicators can be more accurate, but this is because they respond much more slowly
Let me know in the comments if you are using the MACD indicator.
Disclaimer: The information above applies to For educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are unfamiliar with exchange-traded options. All readers interested in this strategy should do their own research and seek advice from a licensed financial advisor.