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MACD - Your Best Friend To Spot Trends
Authored On: 08-Oct-15
Last Modified: 08-Oct-15
About. . .
The article details about how MACD indicator could be one of the best tools on technical charts to spot buy and sell signals.
MACD - being the short for Moving Average Convergence Divergence - can be your best friend to spot trends. There are several indicators but MACD wins in terms of showing the trend early. MACD could be configured very easily on technical analysis software to show the sharp swings in trend (short term changes), as well as for trend changing for medium to longer terms.
In below figure, see how buy and sell signals are determined by MACD for ICICIBANK.
However, note following facts about MACD
Signals may not indicate how strong the same is, or how long the trend will continue. You often will have to judge this using an additional indicator. Using only MACD could trap you on wrong foot, unless you are combining the indicators to make buy sell decisions. See on above diagram, how one of the buy-indication did not sustain.
Divergences are often easy to spot with MACD. Often, a failed signal or signals that did not sustain after showing the trend, leads to further divergence.
Summary
MACD could be your best friend to read the charts. Note following points. . .
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Often, use two different configurations of MACD, one for sharper, short term trends and other standard one 26-13-9 which most of technical analysis softwares provide as ready-made indicator
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Also, use additional indicator for added confirmation. You can find that Momentum or Rate of Change could be good support indicator
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In a trendless movement of stock, MACD signal may move very sharply between bullish zone and bearish zone. In such times, better to wait till trend is confirmed by more than two indicators, before MACD could be used to take positions.