The MACD indicator is a technical analysis instrument that allows traders to obtain buy and sell signals in real-time. This tool is very useful when trading volatile trends, characterized by fluctuation between price and resistance. The index is used to identify the current trend, its strength, and the possibility of a reversal of it.
How the MACD works
This trading instrument consists of a MACD line, a signal, and a bar chart. The MACD line shows the difference between two means with separate time periods.
It reflects how closely they are on the graph, and where they tend to drift. For example, the MACD index can show that the lines are moving closer to or moving away from each other.
This instrument can be toggled by changing the long EMA line to the short line. The latter constantly moves forward, separating from the second. That is why the MACD indicator is hovering around the reference level. The two lines created are called ‘signal lines’.
The greater the difference between the two means (also called “EMA”), the further the MACD chart moves away from the zero lines. Unlike other oscillators, which tend to fall in the range of the reference level, this technical analysis index does not have defined overbought or oversold zones.
To get the most out of this technical instrument, you should know what it means according to different situations.
Let’s see them all:
1. When the line touches the zero line, it means that only two EMA patterns are crossing and their values are the same.
2. When the line is positive and moving upward, it can be deduced that the momentum of the uptrend is about to pick up steam.
3. The reverse and the descending line is an obvious indicator of a bullish impact, which is accelerating at the current limits of the market.
4. If the MACD line is above zero, but is slowing down, it shows that the bullish momentum is softening in the current economic situation.
5. A negative, but bullish chart is a sign that bearish momentum is descending in the market.
It is worth noting that the MACD index is displayed in the same units as the corresponding price trend, for example, euros or dollars. On paper, this instrument has no limits, since the two EMA lines can move from each other as far as possible.
In practice, however, the MACD line tends to return to the reference level over and over again.