The
Primary Purpose Of MACD Indicator
The
ultimate purpose of the Moving Average Convergence Divergence (MACD)
is
to highlight trending assets and those that are consolidating by
using
moving averages convergence and divergence.
The
moving divergence reveals the following:
1/
increase
in bullish momentum in
an up trend,
2/
surge
in bearish momentum in a down trend,
3/
rise
in trading activities,
4/
and
surplus of volatility.
Indeed,
a trending phase is often
preceded by an
above average
trading
volume, momentum and volatility. Moreover, those surges cause moving
averages divergences.
Conversely,
lack of momentum, volatility and balanced trading activities often
cause moving averages convergence.
One
should not mistake
moving averages divergence
with the normal
bullish and bearish price
divergence.
This
time, the
divergence
only means separated apart, parallel or not touching one another.
By
the same token, moving averages convergence refers
to:
moving
averages coming close to one
another, or touching one another, grouping in the same
zone.
Subsequently,
non-trending financial assets (that are consolidating) exhibit
convergent moving averages.
Furthermore,
during a consolidation phase one
will notice a low
volatility or
momentum.
Standard
MACD Purposes
The
standard MACD is MACD (12, 26, 9).
During
a
trending
market, there is a clear divergence (separation)
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 translates into a wider angle between MACD and the
equilibrium line. In this instance,
there is a divergence between the two moving averages.
Now,
it becomes clear that to screen (scan)
for bullish financial instruments, it is not sufficient for MACD to
stay above the zero line but to form a wider
angle with the equilibrium line.
Similarly,
to scan for bearish stocks, MACD should be subzero, and form a wide
angle with the zero line.
After
a clear divergence from the zero line, MACD converges to the zero
line during the quiet market when the volatility, momentum and
trading activities recede. In reality, during the consolidation
market, MACD oscillates
around the zero line. Moreover, it stays in the vicinity of 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 to the zero depicts a low volatility,
momentum, trading activities, and non trending phase (consolidation,
contra-trend or correction). MACD divergence to the equilibrium line
marks a trending market, plus a rising momentum, volatility and
trading activities.
Conclusion
Any
time, one is trading or using the Moving Average Convergence
Divergence (MACD), it is essential to remember its ultimate role that
is to detect tending and non trending financial assets with moving
averages convergence divergence.
Though,
there are many other ways day and swing traders use MACD, one ought
to
combine
other MACD trading strategies with its primary purposes.
