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Trader Toolkit: Return Of The MACD

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Trader Toolkit: Return Of The MACD

With more and more trading platforms and the growing allure of low-to-no-fee brokerages, new traders are confronted with a deluge of options when it comes to trading and investing. But lost in the promises of sleek interfaces and free shares for signing up is the fact that successful trading takes time, practice and an understanding of resources experienced traders use on a daily basis.

With that in mind, we’re going to use this new series of articles to take a look at the charts, ratios and indicators that play an integral role in how traders generate ideas and form convictions on their medium- or short-term trades. To do that, we’ll be using the charts and tools available on the Webull trading app, which offers traders access to real, zero-commission trading in addition to a suite of advanced trading analysis and charting.

In a previous article, we looked at how traders commonly use moving averages to identify trend changes in equities across short and long timeframes. Although moving averages on their own can provide invaluable insight into how to approach a stock, their utility extends to dozens of other technical indicators that they either compose or act as a reference for.

Among the most widely used derivatives from vanilla moving averages (or more accurately their cousin, exponential moving averages, which place a heavier weight on more recent price action) is Moving Average Convergence Divergence, or MACD. 

Like a lot of technical indicators, MACD does exactly what it says on the tin. Namely, MACD shows how much a short-term exponential moving average (typically the past 12 periods) deviates from a longer-term exponential moving average (typically 26 periods). This means that MACD can be negative since the more volatile short-term EMA can diverge from the longer-term EMA in either direction. 

Before we get into how traders use and interpret MACD, let’s take a look at how MACD is represented in the 6-month chart for General Electric Company (NYSE: GE). For reference, MACD is the blue line in the subchart.

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Image source: Webull

On its own, MACD oscillates along a horizontal axis that represents a parity between the long- and short-term EMA. In this chart, it’s the same x-axis as green and red area graph. As such, points above that line indicate short-term momentum exceeding the long-term trend, while the area below indicates lagging short-term action compared to the long-term trend. Overall, a stock with consistent price action will be drawn to the x-axis.

Because MACD is comparative, it’s the trajectory can provide multiple cues to traders. For traders looking to buy and hold a stock, MACD might be used to find stocks without much oscillation between the two moving averages. For intraday traders, MACD might be used to find stocks with steep peaks or deep troughs that might suggest a is developing momentum in a certain direction.

One common formation in MACD is the centerline crossover, which occurs when MACD crosses the x-axis. A centerline crossover suggests that short-term momentum is shifting, either positive or negative, from the long-term trend. Depending on how steep the crossover is, traders might interpret the move as a near-term phenomenon, or an indication of a longer-term price correction.

There is a bullish centerline crossover at 11:00 in this intraday chart for Nvidia Corporation (NASDAQ: NVDA).

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Image source: Webull

Finally, there is one additional element to most MACD charts called the signal line, represented in orange by the above charts. The signal line is another EMA, and the one with the shortest sample duration (typically nine periods). 

Points where MACD crosses the signal line serves to illustrate specific points at which short term momentum is pivoting, with the space between these lines indicating how sharply the stock is moving between buying or selling (this is also represented in the green and red area graph overlaying the MACD chart). There is a sharply bullish signal line crossover in the NVDA chart a few minutes before it makes its centerline cross.

Given the array of uses and interpretations to which MACD lends itself, this brief rundown barely scratches the surface of MACD’s utility. Because of this versatility, there are very few traders who don’t reference MACD in some way shape or form.

Webull is a content partner of Benzinga

Posted-In: MACD WebullFintech Education Markets General

 

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