| |
| |
|
|
Investing Information |
|
Moving Average Convergence Divergence ( MACD ) Charts
The Moving Average Convergence Divergence charts, or MACD charts for short, are a technical indicator that is derived from the more simple moving average. The MACD charts are oscillating indicators, meaning that they move above and below a centerline or zero point. As with other oscillating and momentum indicators, a very high value indicates that the stock is overbought and will likely drop soon. Conversely, a consistently low value indicates that the stock is oversold and is likely to climb. THE 12-DAY AND 26-DAY EMAS The MACD charts are based on 3 exponential moving averages, or EMA. These averages can be of any period, though the most common combination, and the one we will focus on, are the 12-26-9 MACD charts. There are 2 parts to the MACD. We will focus first on the first part, which is based on the stock's 12-Day and 26-Day EMA. The 12-Day EMA is the faster EMA while the 26-Day is slower. The logic behind using a faster and slower EMA is that this can be used to gauge momentum. When the faster (in this case 12-Day) EMA is above the slower 26-Day EMA, the stock is in an uptrend, and vice versa. If the 12-Day EMA is increasing much faster than the 26-Day EMA, the uptrend is becoming stronger and more pronounced. Conversely, when the 12-Day EMA starts slowing down, and the 26-Day begins to near it, the stock movement's momentum is beginning to fade, indicating the end of the uptrend. THE MACD LINE The MACD charts use these 2 EMA by taking the difference between them and plotting a new line. Very often, this new line is depicted as a thick black line in the middle chart. When the 12-Day and 26-Day EMA are at the same value, the MACD line is at zero. When the 12-Day EMA is higher than the 26-Day EMA, the MACD line will be in positive territory. The further the 12-Day EMA is from the 26-Day EMA, the further the MACD line is from its centerline or zero value. THE 9-DAY EMA This line on its own doesn't tell much more than a moving average. It becomes more useful when we take into account its 9-Day EMA. This is the third value when we talk of 12-26-9 MACD charts. Note that the 9-Day EMA is an EMA of the MACD line, not of the stock price. This EMA (the thin blue line alongside the MACD line) acts like a normal EMA and smoothes the MACD line. The 9-Day EMA acts as a signal line or trigger line for the MACD. When the MACD line crosses above the 9-Day EMA from below, it indicates that the downtrend is over and a new uptrend is forming. Time to consider bullish strategies. Conversely, when the MACD line drops below its 9-Day EMA, a new downtrend is forming and its time to implement bearish strategies. THE MACD HISTOGRAM So far, we have covered the most simple form of interpreting the MACD charts. We now look at the MACD histogram. Just as the MACD line is the difference between the 12-Day and 26-Day EMA, the MACD histogram is basically the difference between the MACD line and its 9-Day EMA. So when the MACD line crosses above its 9-Day EMA, the MACD histogram will cross above zero. In order words, a bullish signal is obtained when the MACD histogram crosses above zero, and a bearish signal is obtained when it crosses below zero. POSITIVE AND NEGATIVE DIVERGENCE The MACD histogram forms valleys and peaks. Sometimes, multiple peaks are formed, with each subsequent peak becoming lower and lower. These progressively lower peaks constitue what is known as a negative divergence. A negative divergence on the MACD histogram is an indication that the current uptrend might reverse in the near future. This could happen even though the actual stock price seems to be making higher peaks in the chart. Basically, the MACD histogram negative divergence is a warning that the stock might turn down soon. Similarly, the positive divergence on the MACD histogram predicts the subsequent uptrend. However, sometimes these divergences can create false alarms. If we follow these signals, we could have bought into a downtrend. As such, I would like to remind you that individual indicators such as the Moving Average Convergence Divergence (MACD) charts should not be used on their own, but rather with one or two additional indicators of different types, in order to confirm any signals and prevent false alarms. Steven is the webmaster of http://www.option-trading-guide.com If you would like to learn more about Option Trading or Technical Analysis, do visit for various strategies and resources to help your stock market investments.
MORE RESOURCES:
Investing - Google News |
|
|
|
RELATED ARTICLES
How To Create Wealth In The Stock Market First and foremost, an opportunistic strategy for creating wealth in the stock market is needed. And the opportunistic strategy for creating wealth in the stock market must have two ingredients, a plan and a goal. Advice for International Investors on How to Safeguard Their Profits What are the risks?Today, investors are increasingly turning to global markets to find opportunities for profit, giving urgency to the issue of protecting returns from foreign exchange risk. While there are many excellent investment opportunities to be found all over the world, volatility in the currency markets can and does affect the profitability of these investments. Chinas Great Missed Opportunity While a U.S. Part II of Day Traders and Swing Traders and Options? Maybe! Before every protective put trade it is possible to calculate your anticipated maximum loss. Use the formula: (stock price minus strike price) plus option price. To Retire Rich, Save and Invest Early If you want to retire rich, start saving investing early. The most powerful tool when it comes to retiring rich, is compounding your returns on money saved when you are young. Making It Second Nature Not long ago I was laying on my son's floor throwing one of his toy balls back and forth in the air to myself and I had a strange revelation. I noticed that as I threw the ball up in the air my left arm automatically started to move to where the ball was going to come down. Angel Investors: Who They Are & When Are They Appropriate Angel investors are individuals who invest in emerging business ventures. Angels typically provide both capital and know-how to companies who are in either their start-up or expansion phases. Selecting Rules for Investing and Trading There are three important differences between investing and trading. Overlooking them can lead to confusion. Tyranosaurus Rex Everyone knows T Rex was the most fearsome of all dinosaurs. He could and did kill everything in his path for food or maybe stupid meanness. Keep Stock Market Investment Profits Have you had one of those huge investment winners - a stock that went from $2.00 to $80. An Economical Retirement Investment Plan The practice of economy, directed toward a retirement investment plan in the stock market, is in itself a source of great revenue. It is the art of making the most out of every stock market investment, with the definite purpose or goal being to provide a life that is fully independent of monetary concerns. Creating Momentum with Options - Pro and Cons of At-the-money, In-the-money, and Out-of-the-money To create momentum in your options trading you need to understand the advantages and disadvantages of at-the-money options, in-the-money options and out-of-the-money options.An at-the-money option has both advantages and disadvantages over stock and in-the-money options. Planning for Retirement Almost without exception, people don't start planning for their retirement early enough in their lives. Young people leaving High School or College and going into their first paid position find it difficult to look or see ahead to age sixty or sixty-five. Trading Commodity Futures Using Support and Resistance - Paper Trading Setting Up a Paper Trading AccountQuestion: I cannot trade with "real money" as yet; however, how do I go about setting up a paper trade account?Answer: You can paper trade various ways and it really does not require that you have anything more specialized than a notebook to track your trades and access to charts.Begin by funding your paper trading account with the amount of money you think you will really begin with, whether it is $2000 or $20,000. Finding the Perfect Company The perfect company - it's the holy grail of the investment world. The company that will make its initial investment hundreds of times over. Asset Location - Increase Investing Returns & Reduce Your Taxes Location - Once the holy grail only for real estate investors is fast becoming the mantra for every stock, bond, and mutual fund investor. Experts and studies now recognize managing asset location is second only to asset allocation in determining the success of your investment returns. Investing & Online Stock & Share Trading- The Stock & Share Markets are Booming But Be Warned I had the pleasure of being invited on a friend's yacht to sail in a race on Sydney Harbour yesterday. On board, as one of our motley crew, I met a top ranking corporate executive from one of Australia's largest banks, who we'll call 'Phil' here for the purpose of this article. Evaluating A Money Manager Scams and frauds are designed to take your money through false promises and phony claims. Money management is supposedly designed to increase your net worth. It's Not the Size of Your Bank Account You might think that if you win the lottery or get a huge raise, all your problems will be solved. Sounds logical, right? Well, it might sound logical, but it isn't. The Myth of the Earnings Yield AbstractA very slim minority of firms distribute dividends. This truism has revolutionary implications.
|
||||||||||||||||||
