MACD



Background


MACD (moving average convergence divergence) is a technical tool for trading which serves as a price trend, direction and momentum indicator. To calculate MACD, the exponential moving average (EMA) of last 26 days is subtracted from the EMA of last 12 days.



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Plotting last 9 days EMA of the MACD, on top of the MACD, serves as signal line which gives an idea of buy and sell. MACD falling below the signal line gives bearish signal indicating a time to sell and MACD rising above the signal line gives bullish signal indicating a time to buy. Divergence of security price from the MACD signals a change in the current trend. If there is a dramatic rise in the MACD then it indicates that the security is overbought.


Stochastic integration


Stochastic, better known as stochastic oscillator is also a trading tool to predict the price trends and momentum. In this method the closing price of a security is compared to its price range over a period of time to predict the turning points in the price. Stochastic oscillator uses %K and %D methods. Number of time periods is indicated by %K and moving average of %K is indicated by %D. It is a buying signal when %K line drops below 20.



Bullish crossovers of MACD and stochastic can be said to be occurring simultaneously when the crossovers occur within two days of each other. For a longer price move, the stochastic crossover should occur below the 50 line. Be careful to watch that MACD crossover occurs slightly after the stochastic one so as to get a true indication of the price trend. Though it is not mandatory but it is always safe to consider trading a stock whose current trading value is above its 200 days moving averages.



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