Understanding the MACD crossover - Stock Market Technical Analysis Indicator
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The MACD indicator is also known as the advanced moving average convergence-divergence. Forget I ever said that though because everyone just calls it the MACD.
It is a surprisingly easy technical analysis indicator with a great reputation for getting good results. That’s a dream come true right? An easy indicator that reliably tells you when to buy and sell your shares?
Basically the MACD uses your moving averages to determine if the stock price is gaining steam in an upward or downward direction.
If you haven’t seen our video on moving averages they are pretty simple. They just take the average stock price for a certain time period. So for example, a 50 day moving average is just a graph that shows an average price on any given day of the previous 50 days. So look on this graph, this point here is the average price for these 50 days leading up to hear, and so on and so forth.
So what the MACD does is take 12 day Exponential moving average each day, and minus the 26 moving average price from it. Now that may sound confusing, and that is okay. You just need to know what it means not necessarily all the math behind it.
So the MACD is this line right here. It is the 12 day minus the 26 day moving average. Now if the MACD starts to quickly rise, then it tells us that the stock is gaining momentum. It basically says in the past 12 days the stock price has started moving up faster than it did in the last 26 days, so it is gaining steam.
If the MACD line starts to drop and goes negative, we know that the price of the stock has started to climb much slower in the previous 12 days than it was in the previous 26 days. Or it has even gone negative and is now dropping. In short, if it goes negative you know the stock is losing momentum and the price may start dropping soon.
So the most common way people use the MACD is with what is called a signal line crossover. Basically it looks at the MACD line right here, and signals when it crosses the signal line, which is the 9 day moving average line. now there is some math to understand why it makes sense, but basically when the MACD crosses the signal line from below and goes above it, then it is considered a bullish crossover. This is a buy signal meaning that the stock is gaining momentum in the positive direction. Let’s look at this chart from stock charts.com and get a good idea of what I’m talking about. See right here how the black MACD line crosses over the signal line? Let’s look up and see if we bought right there, then waited for it to cross back over to sell what would happen.
Looks like we would have made good money! The MACD is especially useful with volatile stocks or volatile markets. This particular stock is called UWTI and is a 3x ETF meaning it is 3x as volatile as the commodity that it tracks.
The second most common way people will use the MACD is with what is called centerline crossovers. This is pretty simple to see as well. You are looking for when the MACD line turns positive. So looking here you can see where it is being measured. Once the line gets in the positive then we know the the most recent data shows this stock price climbing quicker than in the past 12 days than it did in the past 26 days.
Similarly, once the MACD line goes into the negative than you have a good indicator that momentum is lost an the price is probably going to start dropping for the next little while.
It is worth nothing that you can use MACD on a daily, weekly, monthly, or any kind of chart. It works the same. You can look at the 30 minute MACD for day trading and get a good idea of daily momentum, or the 6 moth MACD to get a good idea of the long term direction of a stock.