11. Moving Average Convergence Divergence (MACD)
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.
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)
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.
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.
5. How is MACD calculated or derived?
Calculate:
12-period EMA (fast)
26-period EMA (slow)
MACD Line = 12 EMA − 26 EMA
Signal Line = 9-period EMA of the MACD Line
Histogram = MACD Line − Signal Line
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.
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.
8. What are common mistakes when interpreting MACD?
Relying solely on crossovers without confirmation.
Misinterpreting histogram movements.
Ignoring broader market context and trend strength.
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.
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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