Stochastic, MACD, Bollinger Bands Plus Day And Swing Traders

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.

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.