Technical Analysis Tutorial - MACD Indicator Usage

Views 15KJan 25, 2024

The MACD indicator (Moving Average Convergence/Divergence), known in Chinese as the “Index Smooth Heterogeneous Moving Average”, is known by many as the “King of Technical Indicators”. Under the main chart of many software, the MACD indicator is displayed by default, showing how popular MACD is. ForHong Kong stocksundUS StocksThey are equally applicable.

MACD指標-「指數平滑異同移動平均線」
MACD Indicator - Index Smooth Heterogeneous Moving Average

The MACD indicator has three parameters, the default parameters are set to 12 days, 26 days, 9 days.

This article contains a few highlights that will bring you together to understand the principles and uses of MACD indicators.

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Directory:

  1. MACD Indicator Principle: What is MACD Indicator?

  2. MACD Indicator Principle: How to Calculate MACD Indicator?

  3. MACD Indicator Usage: How to spot buy and sell points with MACD?

  4. MACD Indicator Usage: How to View MACD Indicator?

  5. MACD Indicator Usage: MACD Indicator FAQ.

MACD Indicator Principle: What is MACD Indicator?

The MACD indicator (English: Moving Average Convergence/Divergence), known in Chinese as the Index Smooth Heterogeneous Moving Average Indicator, is a classic indicator that predicts movement.

Created in the 1970s by the American Gerald Appel, the MACD indicator is a long-standing and widely used technical analysis tool.

MACD指標(英文:Moving Average Convergence/Divergence)
MACD Indicator (English: Moving Average Convergence/Divergence)

The MACD indicator consists of three key parts: the MACD line, the signal line and the column chart. By analyzing the intersection and divergence of the two indicator lines of the MACD indicator, it helps us to intuitively understand price trends and strength changes.

MACD Indicator Principle: How to Calculate MACD Indicator?

The MACD indicator consists of DIF, DEA and MACD histograms in three parts, the calculation formula is as follows:

  • MACD Line (DIF, Fast Line) =12-Day Moving Average (EMA) - 26-Day Moving Average (EMA)

  • Signal Line (DEA, Slow Line) =9-Day Moving Average (EMA) of MACD Line

  • Column Chart (MACD Histogram) = MACD Line - Signal Line

Note that in some trading software, the MACD line is also called the DIF line and the signal line is called the DEA line.

The formula for calculating the MACD indicator is all you need to do is understand the principle behind it. Many stock software will automatically help us calculate and display it, and all we have to do is analyze the MACD indicator.

MACD指標的計算公式
Calculation formula for MACD indicator

The principle of the MACD indicator is that with an average price for a shorter period (short EMA), minus the average price for a longer period (long EMA), the resulting difference is the MACD line (DIF line), which can reflect a potential upward or downward trend in the market.

訊號線-是MACD線的指數平均值
Signal Line - is the index average of the MACD line

On this basis, a further buy and sell signal is generated through a signal line. The signal line is the index average of the MACD line, which is relatively slow to react to stock price movements. It lags behind the MACD line, hence it is also called the “slow line” and the MACD line is the “fast line”. This fast and slow crossing or reversing lines releases potential buy and sell signals.

柱狀圖=(MACD線-訊號線)×2
Column Chart = (MACD Line - Signal Line) ×2

The column chart is simpler, with its value equal to the fast line minus the slow line, distinguishing positive and negative values in red and green for easy observation. If the column chart is positive (green) and constantly expanding, it indicates a strengthening of the upstream energy; if the column chart is negative (red) and constantly expanding, it indicates a strengthening of the downward energy. Note that some software magnifies its numeric value twice in order to display the column chart more intuitively, i.e., the column chart = (MACD line - signal line) ×2.

MACD Indicator Usage: How to spot buy and sell points with MACD?

The MACD indicator generally has two uses, namely a cross strategy and a backswing strategy.

Cross-strategy

The cross strategy is divided into golden cross and dead cross, abbreviated as gold fork and dead fork.

黃金交叉及死亡交叉
Gold Cross and Death Cross
  • Gold Cross

A gold cross (fork) refers to the MACD line crossing the signal line (fast line up through the slow line), at which point the column chart changes to negative and the color changes from red to green, indicating that the movement is changing from weakness to strength, and then there may be a bullish wave, which is a potential buy signal.

  • Death Cross

A dead cross (dead fork) refers to the signal line crossing the MACD line (slow line up through the fast line), at which point the column chart changes from positive to negative and the color changes from green to red, indicating that the movement goes from strength to weakness, and then there may be a falling wave, which is a potential sell signal.

NOTE THAT THE EASIEST AND FASTEST WAY TO IDENTIFY GOLD CROSSES AND DEAD CROSSES IS NOT TO LOOK AT FAST AND SLOW LINE MOVEMENTS, BUT TO LOOK AT THE SIZE AND COLOR VARIATION OF THE COLUMN CHART. When the column chart gradually shrinks and changes from red to green, it is the golden cross; on the contrary, when the column gradually shrinks and turns from green to red, it is the dead cross.

Backlash strategy

The rear-end Mercedes is strategically divided into rear-end Mercedes and top-back Mercedes, also known as multi-head Mercedes and open-back Mercedes.

Backlash refers to the phenomenon of divergence between technical indicators and price movements. For leading indicators such as the MACD, since their movement is ahead of the price, if the latter take a back, it means that the price may gradually correct in the future, so we find a buy and sell signal from it.

底背馳及頂背馳
Bottom Back Mercedes & Top Back Mercedes

MACD Underside

A pullback indicates that the price has fallen below the previous low, while the MACD line (fast line) is above the previous low, indicating an upward momentum, indicating that the price may be moved up by a fall, which is a potential buy signal.

MACD TOP BRACKET

A top rally indicates that the price has risen above the previous high, while the MACD line (fast line) is below the previous high, showing a bearish momentum, indicating that the price may fall due to the upside, which is a potential sell signal.

MACD Indicator Usage: How to view MACD indicators through Futubull?

Step 1: Go online to Futu and sign up for a new account.(Register now)

Step 2: Open a securities account on the basis of the Futu account.(Open an account now)

Step 3: Fill in your personal and financial details (includingBank Code and Account Number), and then deposit funds via EdDA Quick Deposit, Fast Transfer (FPS), Bank Transfer.(Invest funds immediately)

Step 4: Download the Futubull APP and log in.(Download Now)

Step 5: On the Futubull APP, you can view MACD indicators for stocks, US stocks, and other trading categories in a very convenient place.

  1. First, go to a stock trading page, where you can see a series of technical indicators below the Yinyang candlestick chart, click on the MACD indicator to activate the display, and click again to hide and not show.

富途牛牛APP-MACD指標
Futubull APP-MACD Indicator

2. If you need to modify the parameters of the MACD indicator, you can go to the indicators management page to set the indicator.

修改MACD指標的參數
Modifying the parameters of the MACD indicator

3. On the metrics setup page, you can also add more system-supported technical analysis metrics. We click on the MACD indicator to see what customizations can be made.

MACD指標自訂
MACD Indicator Customization

4. It can be seen that the system supports modifying the parameters of the MACD indicator and setting the color of the indicator line and column chart. The default parameters for MACD are 12, 26, 9, and in general no modification is required.

MACD Indicator Usage: MACD Indicator FAQ

The MACD indicator is very useful, but it is easy for some beginners to generate cognitive and use error zones. Here you can easily brush up on MACD related issues.

How is the MACD different from the moving average (MA)?

The MACD is called the Index Smooth Heterogeneous Moving Average in Chinese, and there is some overlap with the name of the moving average (MA), which is confusing to some.

Simply put, MACD is an upgraded version of MA. MACD has the following advantages over MA:

First, MA generally refers to the simple moving average (SMA), while MACD uses the index moving average (EMA), the calculation method of EMA is slightly more complex than the SMA, equivalent to an improved SMA.

MACD與移動平均線(MA)
MACD vs Moving Average (MA)

Second, the MACD is calculated from the divergence of two EMAs, which reflects changes in trend and intensity, a feature that a single MA does not have.

Thirdly, MA is the main chart indicator, which is superimposed above the Yinyang candlestick chart, while the MACD is a sub-chart indicator, generally displayed in a separate window below the Yinyang candlestick chart. It does not overlap with other indicators, causing the Yinyang candlestick to appear bloated.

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Can MACD be used to assess overbought and oversold?

Over-selling refers to an imbalance of buying and selling power in the short term, which leads to excessive rise/fall in price, so that the opposite trend may occur in the future.

MACD評估超買超賣
MACD Evaluation Overbought and Oversold

Many energy indicators can be used to assess the overbought and oversold of a security, such as the Random Indicator (KDJ), Relative Weak Indicator (RSI), and more. Some people mistakenly also use the MACD to assess overbought and oversold, but this approach is not appropriate. Since the MACD indicator theoretically has no boundaries, it is difficult to say that when the MACD exceeds a certain limit, it will mean that the movement may reverse.

A more appropriate approach is to pair the MACD indicator with some overbought and oversold indicators. If the MACD releases the same buy and sell signals at the same time as other technical indicators, investors can have a greater grip when making trading decisions.

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