To have a clear understanding of MACD, day and swing traders ought to grasp MACD’s

ultimate purpose.  At the end of this article, one will discover MACD indicator like never

seen before, and have a better understanding of this powerful tool.

The fundamental purpose of the Moving Average Convergence Divergence (MACD) indicator

is to confirm both trending and consolidating assets with the moving average convergence

and divergence.  In effect, the moving average divergence reveals the following:

1/ the increase in bullish momentum,

2/ the rush in bearish momentum in a downtrend,

3/ the climb in trading activities,

4/ and the excess of volatility.

View the chart

Image = "chart exhibiting the moving average twenty divergence

and convergence in relation to the moving average fifty"

From June 2014 to October 2014, Wal-Mart-Stores Inc stock

(WMT) was consolidating.  Consequently, the moving average twenty

converged to the moving average fifty.

Notice the divergence between the moving average twenty and fifty

when the stock was trending betwen November 2014 and January 2015.

That is a clear illustration of a moving average divergence.

In general, during a trending phase, there is an above average trading activities

(trading volume), momentum and volatility. Those surges by and large cause moving averages

divergences.  On the contrary, the lack of momentum, volatility and balanced trading activities

will create a moving average convergence.

Quite often, day and swing traders also mistake a moving average divergence with the price

divergence.  However, the moving average divergence only means separated, apart, parallel

or not touching one another.

This divergence has nothing to do with the price divergence that occurs when a financial

instrument displays a lower low at the time when a technical indicator exhibits a higher

low and vice versa.

For the same reason, moving averages convergence refers to:

a/ coming close to one another,

b/ or touching one another,

c/ and grouping in the same zone.

Subsequently, non-trending financial assets (that are consolidating) exhibit convergent

moving averages. Furthermore, a consolidation phase indicates low volatility, momentum

and balanced trading activities.

Purposes Of The Standard MACD

The standard MACD is MACD (12, 26, 9).

Throughout a trending market, there is an apparent divergence between MACD and the

zero line. Note that MACD is the moving twelve, and the zero line is the moving average

twenty-six. That divergence often translates into a wider angle between MACD and the

equilibrium line. In this occurrence, there is a divergence (separation) between the two

moving averages.

Nevertheless, it is not sufficient for MACD to reside on top of the zero line if one is screening

for trending financial instrument. There should also be a constant ample angle between

the MACD indicator and the equilibrium line.

Similarly, to scan for bearish stocks, MACD should be subzero, and form a broad angle with

the zero line (equilibrium line).

After an apparent divergence from the zero line, MACD often converges to the zero line during

the low volatility market (when the momentum and trading activities recede). In reality, during

the consolidation market, MACD frequently oscillates around the zero line.  Moreover, it also

stays near the zero line.  In this case, there is a convergence between the Moving average

twelve (MACD) and twenty-six (equilibrium line).

The convergence of MACD indicator to the zero line depicts a low volatility, momentum, trading activities,

and non-trending phase (consolidation, contra-trend or correction) or a pause before a continuation.

MACD’s divergence to the equilibrium line marks a trending market, plus a rising momentum, volatility

and trading activities.

View the chart

Image = "daily chart is depicting the standard MACD convergence

divergence in relation to the zero line (equilibrium line)"

Notice that there is a clear divergence between MACD and the zero line

during the trending phase (June 2014 to July 2014).  On the hand, when

Intel stock (INTC) was consolidating from August 2014 to September 2014,

MACD indicator was converging towards the zero line.

Surely, that demonstrates MACD convergence and divergence.

Conclusion

Anytime, one is trading or using the Moving Average Convergence Divergence (MACD); it is vital

to remember its ultimate role that is to detect trending and non-trending financial assets with

the moving average convergence divergence.  Though, there are numerous other ways day and

swing traders use MACD indicator; one ought to merge other MACD trading strategies with its primary purpose.

This is about clear understanding MACD.

 Video Playlist:  Clear Understanding MACD