What is Technical Analysis?
Technical Analysis (TA) is a market analysis strategy that can be used in order to assist traders in identify potential trading opportunities. A trader utilizing TA strategies will typically analyze statistical trends gathered from historical asset prices.
Chart indicators are a specific subset of TA used for performing market analysis. Chart indicators can be applied to price charts and provide traders with additional data used to make trading decisions.
There are thousands of chart indicators available which use a variety of data in order to give traders insights into future price movements. The Ookiversity chart indicator series will focus on some of the more popular indicators. In this weeks article we are focusing on MACD (Moving Average Convergence and Divergence).
MACD is a trend-following indicator that shows the relationship between two moving averages of a security’s price. The MACD is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA.
How are MACD used in Trading Strategies
Moving average convergence and divergence shows whether the price trend will continue or reverse; it oscillates within a band (above and below a centerline).
The MACD comprises two lines, the MACD line and the Signal line.
- Signal line crossovers provide buy and sell signals depending on the trend.
- The MACD line has two lines; a fast line and a slow line. The fast line crossing through and above the slow line triggers a buy signal (bullish), while a sell signal occurs when the fast line crosses through and below the slow line (bearish).
MACD signals can either be bullish or bearish. MACD divergences are popular trading signals. A divergence doesn't forecast all reversals, in some cases they provide a "false positive", meaning that the price of the asset does not follow through in the manner predicted by the divergence signal.