Moving Average Convergence Divergence (MADC)


 
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Moving Average Convergence Divergence (MADC)
Oscar Pyngrope, Student (MBA), India

WHAT IS MOVING AVERAGE CONVERGENCE DIVERGENCE (MADC)
MADC is a technical analysis indicator. It is used to spot changes in the direction and momentum of a trend in a stock's price.
The MADC uses the difference between the short term price trend (12-day Exponential Moving Averages (EMA)) and the long term price trend (26-day EMA) to anticipate future movements.

HOW TO CALCULATE MADC
To calculate the MADC subtract the 12 day EMA from the 26-day EMA, then plot a 9-day EMA also known as the “signal line”on top of the MACD on a chart, which functions as a trigger for buying and selling decisions.

INTERPRETING THE MADC CHART
  • A positive MACD line indicates that the 12-day EMA is above the 26-day EMA, this means upside momentum is increasing.
  • A negative MACD line indicates that the 12-day EMA is below the 26-day EMA, this means downside momentum is increasing.
SIGNALS GENERATED BY THE MACD INDICATOR
  • Signal line crossovers: They are the most common MACD signals, when the MACD line crosses above the signal line it shows a bullish signal that triggers an investor to purchase the underlying security and when the MACD line crosses below the signal line it shows a bearish signal that triggers an investor to sell the underlying security.
  • Center line crossovers: A center line crossover occurs when the MACD line moves above and below the zero line or center line, when the MACD line crosses above the zero line it shows a bullish signal that triggers an investor to purchase the underlying security and when the MACD line crosses below the zero line it shows a bearish signal that triggers an investor to sell the underlying security.
  • Divergences: Divergences form when the MACD diverges from the price action of the underlying security. When the MACD forms a higher low and the stock price of a security records a lower low and forms a bullish divergence. A bearish divergence forms when the stock price of a security records a higher high and the MACD line forms a lower high.
 

 















 

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