Home Trading What is the MACD Indicator?

What is the MACD Indicator?

by Conor Adan

The term “moving averages” is often used within the realm of technical analysis for stock market and financial products, and almost every stock trader has a basic information of what they are and how they are measured to determine predictions of rise and drop in share market. Yet very few stock managers truly understand the details of moving averages and how in many different ways they can be used to excel trading profits in the stocks and financial markets.

MACD or Moving Average and Convergence Divergence is a trend analysing indicator developed by Gerald Appel. The five most commonly practiced moving averages types are the lines, complex, simple, or arithmetic; the triangular; the variable; the exponential; and the weighted moving average. Moving averages is very flexible, easy to combine, add or subtracted. It can be calculated on any financial data series, stocks, shares including all permutations of a security’s open, close, low, high, volume, or other indicator.

It is also inter-looped that means a moving average of another moving average is applied in technical analysis to calculate predictions over a period of time.

You must be wondering by now how the complex calculations are done in moving averages technical analysis. Let us check how to use the macd indicator, When you start calculating a moving average, a detailed preparation is needed in terms of collation of data. First a mathematical analysis of the security’s average price over a predefined time period is done. As the security’s value fluctuates, its average price proportionally moves up or down. An indicator with a buy signal is generated to alert the trader when the security’s value rises above its moving average, and similarly a sell signal is indicated when the security’s value drops below its moving average.

The only important difference between the various forms of moving averages is the emphasis assigned to the most recently calculated price data. Exponential, expansive and weighted averages give more emphasis to recent prices of the stock or commodity being checked. Triangular averages give more weight to values in the median of the time period. While variable moving averages fluctuates the weighted based on the volatility of values. When the prices changes in speculative trading, variable moving averages accordingly reflect it in data.

Stock value movements of all recently traded securities are a measure of fluctuations and therefore at first glance may appear to be very erratic and not worthy of taking decision. To the unskilled trader, the price or value chart of any targeted security resembles a mess of complex lines with little meaning to the onlooker. It appears too cluttered and incomprehensible. Sometimes. even to an experienced trade analyst price or value volatility can be very indecipherable and misleading. There are methods to remove the complexities and eliminate wild undulations so that it becomes easily readable so as to enable the analyst to detect the underlying trend for giving outcome. It involves methods to reduce the undulations and segregate the overall movement of values to isolation. This is the function of simplifying moving averages.

All averages of values or prices tend to respond to fluctuations less actively than the values from which they are calculated. This means that as the gap increases the value changes, as in the greater the number of days from the point of initiation of calculating average. The data is further composed for the gradual fluctuations relative to the value from which it is originally calculated. This is how moving averages technical analysis is completed.