MACD, as it is widely known, is one of the most commonly used Technical indicators that gives a very good overview of the current Trend that is in place.
For the sake of this discussion, we shall consider a stock from Indian market, BHEL.
MACD is formed using another very commonly used indicator, EMA(Exponential Moving average). The Difference between 26 day EMA and 12 day EMA forms the Fast line. Slow line is usually a nine day average. When the two lines cross-over it signals a buy or a sell. This is the simplest form of MACD assessment. There is another popular tool within MACD, Convergence. Let us now assess the Price movement based on MACD.
1st BLUE Line: In Jan 2005, Fast line crossed the slow line, down-wards. Price of BHEL moved from around 780 to a low of around 630. 150 or nearly 20% Profit in a very short span.
2nd BLUE Line: In late Jan 2005, Fast line crossed again. But this time, it crossed from below the slow line to move up. This happened when the price was around 720. Again with a high of around 870. A 150 or nearly 21% Profit within a short span.
3rd BLUE Line: In the second half of Feb 2005, Fast line again crossed down. Price moved down from around 870 to a low of 740. Again a decent 130 profit.
4th BLUE Line: In late March 2005, Fast line crossed above. But this time the price has been relatively stable and did not offer a huge profit.
5th BLUE Line: In early May 2005, both lines(Fast and Slow) crossed above the 0 line. Zero line is the most decisive line that shows whether bulls or bears are in control. Anything above this zero line is always a good buy. In BHEL case, once both lines crossed the zero line, the price around 800 it touched a high of about 950+. Again a decent 150 profit in a very short span.
Though it looks easier on paper and when we look at charts. This may not be the case while you are trading. But again, as you can see MACD gives a pretty good idea of where the stock is headed to, in the short term. And you can definitely make some money out of it.
So, to sum up. MACD is a powerful indicator that shows you the underlying trend. And in most, if not all cases, MACD is correct in depicting the trend. But as with any other indicator, one should NEVER rely on only one indicator and must take decisions only after confirming from more than 3 or 4 indicators.
Earlier Articles:
Technical Analysis & Decision Making . . . . Support/Resistance Level and It's importance . . . . Trading System . . . . Fibonacci Retracements And How to Benefit From It . . . . BreaOuts & BreakDowns of Stocks . . . . Crossovers-Bullish & Bearish . . . . Volume & It's Importance
Source: stocks.dlngroup.com
