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11. Moving Average Convergence Divergence (MACD)

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1. What is MACD (Moving Average Convergence Divergence)?

MACD is a trend-following momentum indicator that shows the relationship between two moving averages of a stock’s price. It helps identify bullish and bearish momentum, potential buy/sell signals, and trend direction.

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2. Components of MACD?

  • MACD Line: 12-period EMA − 26-period EMA

  • Signal Line: 9-period EMA of the MACD Line

  • MACD Histogram: MACD Line − Signal Line (shows the difference between the two lines)

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3. Pros and Cons of MACD?

Pros:

  • Highlights momentum shifts and trend reversals.

  • Easy to read and interpret.

  • Works well in trending markets.

Cons:

  • Can lag, as it’s based on moving averages.

  • May give false signals in sideways markets.

  • Less effective in low-volatility conditions.

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4. What is the purpose of MACD in stock analysis?

  • Identify trend direction and momentum strength.

  • Spot bullish/bearish crossovers.

  • Signal divergence between price and momentum.

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5. How is MACD calculated or derived?

  1. Calculate:

    • 12-period EMA (fast)

    • 26-period EMA (slow)

  2. MACD Line = 12 EMA − 26 EMA

  3. Signal Line = 9-period EMA of the MACD Line

  4. Histogram = MACD Line − Signal Line

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6. When should traders use MACD?

  • To confirm trend continuation or reversal.

  • To identify momentum entry/exit points.

  • As part of a trend-following or swing trading system.

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7. What are the limitations or risks of using MACD?

  • May lag behind price, especially during fast moves.

  • Gives whipsaws in choppy markets.

  • Doesn’t indicate overbought/oversold levels like RSI.

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8. What are common mistakes when interpreting MACD?

  • Relying solely on crossovers without confirmation.

  • Misinterpreting histogram movements.

  • Ignoring broader market context and trend strength.

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9. How can MACD be combined with other tools for better accuracy?

  • Pair with RSI to assess overbought/oversold levels.

  • Combine with price action patterns or support/resistance zones.

  • Use with volume indicators to confirm strength of moves.

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10. How do professional traders interpret MACD differently from beginners?

Professionals:

  • Use divergence and histogram momentum for early trend signals.

  • Modify settings (e.g., 5-35-5) based on asset behavior.

  • Confirm signals with multi-timeframe analysis and market structure.

Beginners:

  • Trade every crossover without filtering noise.

  • Don’t understand how MACD lag affects entries.

  • Often skip using MACD with other confirming tools.

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