Technical Analysis Tutorial - MACD Indicator Usage
The MACD indicator (Moving Average Convergence/Divergence), also known as the "king of technical indicators", is called the "index smoothing convergence/divergence moving average line" in Chinese. MACD is so popular that it is default displayed on the main chart of many software. It is applicable to Hong Kong and US stock market. The MACD indicator has three parameters, and the default settings are 12 days, 26 days, and 9 days. This article includes several key points to help you understand the principle and usage of MACD indicators.Hong Kong stocks and US stocksare both equally applicable.
The MACD indicator has three parameters, and the default settings are 12 days, 26 days, and 9 days.
This article includes several key points to help you understand the principle and usage of MACD indicators.
Contents:
What is MACD indicator principle?
MACD indicator principle: how to calculate the MACD indicator?
MACD Indicator Usage: How to Use MACD to Find Buy and Sell Points?
How to view MACD indicators?
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Common questions about MACD indicators.
What is MACD indicator principle?
The MACD indicator (Moving Average Convergence/Divergence), Chinese name is index smoothing convergence/divergence moving average line indicator, is a classic trend prediction indicator.
The MACD indicator was proposed by American Gerald Appel in the 1970s, and it is a technical analysis tool with a long history and wide usage.
The MACD indicator consists of three key parts: the MACD line, the signal line, and the histogram. Analyzing the cross and separation of the two indicator lines of the MACD indicator can help us intuitively understand changes in price trends and strength.
MACD indicator principle: how to calculate the MACD indicator?
The MACD indicator consists of three parts: DIF, DEA, and MACD histogram, with the following formulas:
MACD line (DIF, fast line) = 12-day moving average line (EMA) - 26-day moving average line (EMA)
Signal line (DEA, slow line) = 9-day moving average line (EMA) of MACD line
Histogram (MACD histogram) = MACD line - signal line
Note that in some trading software, MACD line is also called DIF line, and signal line is called DEA line.
We only need to roughly understand the calculation formula of the MACD indicator. Many stock software will automatically calculate and display it for us. What we need to do is to analyze the MACD indicator.
The principle of the MACD indicator is to subtract the moving average price of a shorter period (short-term EMA) from that of a longer period (long-term EMA) to obtain the difference, which is the MACD line (DIF line). It can reflect the potential upward or downward trend of the market.
On this basis, further buy and sell signals are generated through a signal line. The signal line is the exponential average value of the MACD line. It reacts relatively slowly to the trend of stock price, lags behind the MACD line, and is therefore called the "slow line", while the MACD line is the "fast line". The potential buy and sell signals can be clearly released by the cross or bearish of these two lines.
The histogram is even simpler, its value equals to the fast line minus the slow line. To make it easier to observe, it is differentiated by red and green to represent positive and negative values. If the histogram is positive (green) and keeps expanding, it indicates that the upward energy is strengthening; if the histogram is negative (red) and keeps expanding, it indicates that the downward energy is strengthening. Note that some software will magnify the value of the histogram by two for a more intuitive display, that is, the histogram = (MACD line - signal line) × 2.
MACD Indicator Usage: How to Use MACD to Find Buy and Sell Points?
There are generally two ways to use the MACD indicator: crossover strategy and bearish strategy.
Crossover Strategy
The crossover strategy is divided into the Golden Cross and the Death Cross, abbreviated as a crossover and a death crossover.
Golden cross
Golden cross (also known as 'golden cross') refers to the situation where the MACD line crosses above the signal line (the fast line crosses above the slow line), at this time the histogram changes from negative to positive, the color changes from red to green, indicating that the market has turned from weak to strong, and there may be a potential buying signal in the future.
Death cross
Death cross (also known as 'dead cross') refers to the situation where the signal line crosses above the MACD line (the slow line crosses above the fast line), at this time the histogram changes from positive to negative, the color changes from green to red, indicating that the market has turned from strong to weak, and there may be a potential selling signal in the future.
When identifying golden cross and death cross, the simplest and easiest way is not to look at the trend of the fast and slow lines, but to look at the size and color change of the histogram. When the histogram gradually shrinks and changes from red to green, it is a golden cross; conversely, when the histogram gradually shrinks and changes from green to red, it is a death cross.
Backtesting strategy
The backtesting strategy is divided into bottom backtesting and top backtesting, also known as bull backtesting and bear backtesting.
Backtesting refers to the phenomenon that technical indicators and price trends show differentiation. For leading indicators like MACD, since their trend is ahead of the price, if they have backtesting with each other, it means that the price may gradually correct, so we can discover trading signals from them.
MACD bottom backtesting
Bottom backtesting refers to the situation where the price falls below the previous low point, but the MACD line (the fast line) is higher than the previous low point, indicating an upward trend. This indicates that the price may turn from decline to rise, and is a potential buying signal.
MACD top backtesting
Top backtesting refers to the situation where the price rises above the previous high point, but the MACD line (the fast line) is lower than the previous high point, indicating a downward trend. This indicates that the price may turn from rise to decline, and is a potential selling signal.
How to view the MACD indicator through Futubull?
Step 1: Go to the Futu official website and register a new account.(Register Now)
Step 2: Open a securities account based on your Futu account.(Open an account now)
Step 3: Deposit funds by filling in personal and financial details (including bank code and account number) and then depositing funds by eDDA swift deposits, FPS, or bank transfers.Bank code and account number.Then, deposit funds via eDDA quick deposit, Faster Payment System (FPS), or bank wire transfer.(Invest immediately)
Step 4: Download and log in to the Futubull app.(Download now)
Step 5: On the Futubull app, you can easily view MACD indicators for Hong Kong stocks, US stocks, and other trading categories. First, enter the individual stock page and you will see a series of technical indicators below the candlestick chart. Click on the MACD indicator to activate the display. Click again to hide it.
Futubull app - MACD indicator
2. If you need to modify the parameters of the MACD indicator, you can enter the indicator management page to make settings.
3. On the indicator settings page, you can also add more technical analysis indicators supported by the system. Click on the MACD indicator to see the custom settings.
4. You can see that the system supports modifying the parameters of the MACD indicator and setting the color of the indicator line and bar chart. The default parameters of MACD are 12, 26, 9 and generally do not need to be modified.
How to use MACD indicators: Common questions about MACD indicators
The MACD indicator is very useful, but some beginners may have cognitive and usage errors. Here, we will briefly summarize some of the relevant issues related to MACD.
What is the difference between MACD and moving average (MA) indicators?
MACD is also called exponential moving average convergence divergence and the name overlaps with moving average (MA) indicators, which may cause confusion for some people.
Simply put, MACD is an upgraded version of MA, which has the following advantages compared to MA:
First, MA generally refers to the Simple Moving Average (SMA), while the Moving Average Convergence Divergence (MACD) uses the Exponential Moving Average (EMA), which is slightly more complicated to calculate than SMA and can be considered an improved version of SMA.
Second, MACD is calculated from the difference between two EMAs and can reflect changes in trend and strength, a function that cannot be achieved by a single MA.
Third, MA is a primary chart indicator that is displayed over the candlestick chart, while MACD is a secondary chart indicator that is generally displayed in an independent window below the candlestick chart and does not overlap with other indicators, making the candlestick chart less cluttered.
Can MACD be used to evaluate overbought and oversold conditions?
Overbought and oversold refer to the imbalance of buying and selling forces in the short term, resulting in excessive upward/downward movement in prices, which may lead to a phenomenon of the opposite trend in the future.
Many momentum indicators can be used to evaluate overbought and oversold conditions in securities, such as stochastic indicators (KDJ indicators) and relative strength indicators (RSI indicators), among others. Some people mistakenly use MACD to evaluate overbought/oversold conditions, but this is not appropriate. This is because MACD theoretically has no boundary, and it is difficult to say that when MACD exceeds a certain limit, it will mean that the trend may reverse.
A more appropriate approach is to combine MACD with some overbought/oversold indicators to use. If MACD and other technical indicators release the same buy/sell signal at the same time, investors can have greater confidence when making trading decisions.
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