Analysis Of Moving Average Convergence Divergen... !!TOP!!
This study is aimed at undertaking technical analysis of selected companies included in the CNX Nifty. Technical Analysis is widely used by traders for trading decisions in the stock market especially intraday trading. Various technical indicators like the moving averages or momentum indicators assist the traders in decision making. One such trend indicator is the Moving Average Convergence and Divergence (MACD) indicator. This working paper analyses the application of MACD indicator on selected five stocks from the National Stock Exchange (NSE). Certain precautionary measures have also been suggested for successful implementation of the indicator. This project also demonstrates how MACD can be of valuable use for the investors in marking their investment decisions.
Analysis of Moving Average Convergence Divergen...
The moving average convergence divergence (MACD) is a technical indicator that shows the relationship between two moving averages of an asset's price. Its purpose is to reveal changes in a trend's direction, strength, momentum, and duration in the underlying security's price.
The standard value settings for the MACD are 12, 26, and 9, i.e., the shorter exponential moving average is taken over 12 time periods, the longer over 26 time periods, and the signal line is calculated from a 9-period.
The MACD and RSI are both trend-following momentum indicators often used in tandem to give analysts and traders a better technical understanding of market conditions. While the MACD measures the relationship between two moving averages, the RSI measures price change in relation to recent price levels.
Note that when the MACD line (the faster moving average) is above the signal line, the bars in the histogram are above the zero line, which is a bullish signal. When the MACD line is below the signal line, the histogram bars are below the zero line, which is generally bearish.
Important: The difference between short-term moving averages and long-term moving averages is that short-term MAs are used for smaller time-frames to find the moving average, while long-term MAs are used for wider time-frames. The underlying function is the same.
In addition to signaling, potential buy or sell signals, the moving average convergence divergence could be used for warnings of potential change in the direction of stocks, futures, and currency pairs.
While the moving average convergence divergence (MACD) indicator measures the difference between two separate exponential moving averages (EMAs), the relative strength index (RSI) measures the difference in selected price highs and lows in a chart. These technical analysis tools are used together by traders.
The calculated moving averages will inevitably converge, cross over one another, and then proceed to diverge, or move away from each other, making the MACD jump over and under the zero line as this happens. Traders are then able to watch for these signaling crossovers and divergences in order to help them spot changing market trends, either bullish or bearish. Sometimes explaining the MACD with words gets confusing. Take a look at the picture below.
The picture above clearly illustrates how shorter-term and longer-term moving averages come closer together (converge), move further apart (diverge), and cross over one another. The MACD reflects the changing relationship of short-term exponential moving averages to long-term exponential moving averages.
Traders and analysts typically use closing prices for 12-day and 26-day time periods to generate the EMAs used to calculate the Moving Average Convergence Divergence. Following this, a 9-day moving average for the MACD line itself is then plotted alongside the indicator to serve as the signaling line that will help illuminate when a market may be turning.
The picture above clearly indicates the Moving Average Convergence Divergence line, the signaling line, as well as the MACD histogram, which is a representation of the difference between the 9-day moving average and the MACD. When the MACD Oscillator line crosses above the 9-day average (signaling line), the histogram reads as positive (above the zero line indicated on the right-hand side of the MACD window). Conversely, the histogram is negative when the MACD dips below the signaling line.
The MACD indicator shows us the relationship between two exponential moving averages for a selected instrument. In the basic setup, the MACD can be calculated by subtracting the longer moving average with a period of 26 (EMA 26) from the shorter moving average with a period of 12 (EMA 12). The reason why the exponential moving average is used for its calculation is that this type of moving average assigns more weight to recent prices.
Moving Average Convergence/Divergence or MACD is a momentum indicator that shows the relationship between two Exponential Moving Averages (EMAs) of a stock price. Convergence happens when two moving averages move toward one another, while divergence occurs when the moving averages move away from each other. This indicator also helps traders to know whether the stock is being extensively bought or sold. Its ability to identify and assess short-term price movements makes this indicator quite useful.
MACD can either be positive or negative. MACD value is positive when the 12-day EMA (blue line) is above the 26-day EMA. It is important to know that when the stock price is rising, the short-term average will usually be greater than the long-term moving average. This is because the short-term average will be more responsive to the current market price compared to the long-term average. Thus, a positive value indicates a positive momentum in the stock. The greater the momentum, the greater will be the magnitude.
Stochastic indicators are another type of key indicators in technical analysis. While the MACD relies on moving averages, stochastic indicators use a formula based upon current stock prices along with their highest high prices and lowest low prices in the recent past.
MACD is an important tool of the moving average category. It is best used when trading with daily data. A crossing of the MACD above or below its signal line may also provide a directional signal for some traders, much as a crossover of the 9-day and 14-day SMAs may.
Therefore, the MACD is essentially a momentum oscillator that is derived from multiple moving averages. The most basic interpretation is to buy when the MACD line crosses above the signal line and sell when it drops below it.
It is important to mention many traders confuse the two lines in the indicator with simple moving averages. Remember, the lines are exponential moving averages and thus will have a greater reaction to the most recent price movement, unlike the simple moving average (SMA).
The most important signal of the moving average convergence divergence is when the trigger line crosses the MACD up or down. This gives us a signal that a trend might be emerging in the direction of the cross.
This time, we are going to match crossovers of the moving average convergence divergence formula and when the TRIX indicator crosses the zero level. When we match these two signals, we will enter the market and await the stock price to start trending.
The two red circles show the contrary signals from each indicator. Note in the first case, the moving average convergence divergence gives us the option for an early exit, while in the second case, the TRIX keeps us in our position.
If you are a fan of trading with moving averages and unfamiliar with the alligator indicator, get ready for a pleasant surprise. In this article, we are going to do a head-to-head comparison of the...
Moving average convergence divergence (MACD) is among the technical indicators with a huge popularity when it comes to trading. The MACD is a preferred method by traders worldwide, because it is simple to understand and also flexible. It is usually used both as a trend-following indicator and as one gauging momentum.
The idea with the Moving Average Convergence Divergence is straight-forward. This indicator presents the difference between the 12-day and 26-day exponential moving averages (EMA) of a tradable instrument. If we are to compare these two moving averages that comprise the MACD, the 12-day EMA is evidently the faster and the 26-day EMA is the slower one. What is similar about them is, that their values are calculated with the use of close prices of the respective period. On the chart, an additional 9-day EMA is usually plotted, with its use being to act as a signal for long or short entries in the market. The MACD usually produces a signal to buy, in case it goes above its 9-day EMA. The indicator produces a signal to sell, in case it goes below its 9-day EMA.
This study aims to determine whether, by means of the application of genetic algorithms (GA) through the traditional technical analysis (TA) using moving average convergence/divergence (MACD), is possible to achieve higher yields than those that would be obtained using technical analysis investment strategies following a traditional approach (TA) and the buy and hold (B&H) strategy.
Agudelo Aguirre, A.A., Duque Méndez, N.D. and Rojas Medina, R.A. (2021), "Artificial intelligence applied to investment in variable income through the MACD (moving average convergence/divergence) indicator", Journal of Economics, Finance and Administrative Science, Vol. 26 No. 52, pp. 268-281. -06-2020-0203
For many studious scholars in financial markets, TA has evolved in recent years moving from graphic analysis with predominance on visual interpretation and high subjectivity load, to the use of sophisticated statistical and computational tools (Metghalchi and Garza, 2013). These advanced analysis tools include moving averages, the relative strength index (RSI), Bollinger bands (BB), the moving average convergence/divergence (MACD), the stochastic process and momentum indicators, as well as another important number of indicators (Gold, 2015) which help to analyze the momentum of the price trend to identify weaknesses that indicate a possible change in the trend into the future. Among the different indicators of TA, one of the most used by traders worldwide is the MACD (Agudelo Aguirre et al., 2020). MACD is constructed by three lines: one is the so-called MACD line, which is calculated as a difference of two exponential moving averages (EMAs) of the price of the asset with a standard data number of 26 and 12, a second line that conforms to the EMA of nine MACD line data and a third fixed horizontal line with the value of zero (Ivanovski et al., 2017). Although these parameters are used in general for the construction of the indicator to be applied in different types of investment, there are studies such as the one carried out by Wang and Kim (2018) that determine that the validity and sensitivity of the MACD have a strong relationship with the selection of the parameters which could produce a higher or a lower return, depending on the behavior of the asset pricing. 041b061a72