Wednesday, November 26, 2008

Stock Technical Indicator: Moving Average Convergence Divergence (MACD)

Moving Average Convergence Divergence or commonly known as MACD is a very useful technical indicator to identified a trend of the stock market whether the market is bullish or bearish.

For stock traders, MACD is very useful for other indication such as identifying the bullish or bearish of a stock by using MACD divergence or convergence, using MACD to make decision to buy and sell a stock and so on.

In this post, I have included some graphs from KLCI (Malaysia Stock Market Composite Index) to show you the usefulness of MACD in our market. So, read on to learn more about MACD and trade your way to success.

By using MACD, stock traders can have a clear idea of the trend of a market whether a market is trending up or trending down. Before you proceed to the examples below, please familiarize yourself with the zones of MACD:

I hope the picture above will help you understand the zones in MACD. The Red line is the Signal line, the Blue line is the MACD line. Normally, I only look at the Blue line which is the MACD line. Please look at some examples below:

Example No. 1: MACD Showing the Start of Bullish

The graph above is taken from the market movement of KLCI from 30/11/2007 to 22/1/2008. From the graph above, the two blue arrows are showing the crossing of the MACD line at the centerline (X-axis). This means that the market is now going to enter the positive zone which means the market is going to start becoming bullish. So, now you should place a buy order to buy in the stocks that you like. This is because the when MACD is entering the bullish zone, it normally will last quite long time. So, the bullish will stay for quite a while and as a trader, you can take advantage of the market and make money from it.

The second arrow indicates that the MACD is crossing the centerline again (X-axis) and this time, it is going into the negative zone which is the bearish zone. Now, look at the price movement of KLCI, it is moving down.

**Remember: This is a good indication to show that a market is changing direction.

Example No. 2: Show the Effect of KLCI on the Price Movement of 4863 TM

The graph above is the price movement of 4863 TM and it is taken at the same time range as Example No. 1 which is from 30/11/2007 to 22/1/2008. You can now look at the price movement of the stock. When the KLCI is crossing the centerline which moves from negative to positive zone, the price of TM is also experiencing the same effect which is moving from lower price to higher price.

**Remember: When you see that the KLCI is moving from negative zone to positive zone or the other way round, it is a good indication of changing trend. So, most of the stocks will shows the effect of KLCI trend movement.

By using MACD alone can help us find the change in direction of a stock or get an indication of the direction of the whole market. But if you are using MACD alone to set buy or sell order, it might not be a good indication because the price movement of a stock is affected by other factors such as Volume, Relative Strength Index, Company's News and so on.

So, never use a single technical indicator to decide whether you should buy or sell a stock. You need to get more confirmation from other indicators. I will talk more about other technical indicators in my coming posts.


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