H. Economics 4th
November 20, 2014
MACD (Moving Average Convergence Divergence) is a graph indicator that uses the difference between a short-term and long-term price trend (usually a 12 day moving average and a 26 day moving average period) to help figure out movements that can identify when to buy or sell a stock. Basically, it’s good for helping traders notice momentum shifts and trends, which will help them decide when to buy or sell a stock. In order the get the MACD line of a stock you need to subtract-for example- the 12 day EMA period from the 26 day EMA period. Then what you would do is plot a 9-day moving average line called the signal line. The signal line is also known as the trigger line as it lets you know went you should buy or sell stock. With this graph you can identify two types of crossovers: bullish and bearish crossovers. These crossovers our triggers that will help you decide when to buy or sell a stock. The bullish crossover is when the MACD line crosses above the signal line to let you know that it’s time to buy the stock because the price is going up and you will make money. When there is a bearish crossover, it is letting you know that it’s time to sell the stock, so when the MACD line crosses below the signal line, it’s a trigger that you should sell. However, there is also some caution you have to take in trusting these two crossovers. Just because the bearish signal is telling you to sell, it doesn’t mean you should because you don’t know if it’s going to keep decreasing right away. It could’ve been just a false signal and the next day the MACD line is increasing again and you wouldn’t have made that money if you sold your stock. There are several occurrences of this and it’s called whiplash, which is also known to be the biggest disadvantage in using MACD . This is why you should wait a little after the signals to make sure it’s the correct one. For example, if you looked at...
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