Some indicators follow trends. Other indicators predict the future prices. Trend following indicators may also be referred to as lagging indicators. Leading indicators predict future prices or outcomes. Most investors find it easier to trade when following the trend. However, it is simply a preference and each investor must determine his or her preferences.
One investing approach uses leading indicators for trading markets and lagging indicators for trending markets. Many indicators will determine if the prices are trending or trading for the investor. Predicting future trending or trading prices is far more difficult than assessing this in the present.
The MACD is a lagging or trend following indicator and will be discussed in this article. Most of the software analysis tools in the Top Ten Reviews have the MACD indicator in their charting tools or technical indicator list.
MACD Moving Average Convergence Divergence
The MACD (acronym pronounced MAC Dee) can be calculated by securing the 26 day moving average of a particular security s price and subtracting it from a 12 day moving average of the security s price. The result of this calculation is the MACD indicator. The MACD oscillates above and below the zero starting point.
When the 12 day moving average is larger than the 26 day moving average, a positive number will be the result of the calculation. Thus, the MACD will appear above zero on the chart. When the indicator is above zero, this indicates that the security is bullish or exhibiting an upward trend. A larger 12 day average indicates that the market is progressing faster than the 26 day average.
When the 12 day moving average is smaller than the 26 day moving average, a negative number will be the result of the calculation. Thus, the MACD will appear below zero on the chart. When the indicator is below zero, this indicates that the security is bearish or exhibiting a downward trend. A smaller 12 day average indicates the market is progressing slower than the 26 day average.
A signal line is typically plotted on top of the MACD within the chart. The signal line is a 9 day moving average of the MACD. The signal line indicates to the investor when the two moving averages will converge.
MACD s are generally used to follow trends. Many other indicators are capable of trend following; however, this is one of the common technical indicators in an investor s arsenal. This technical indicator is preferred to evaluate long trends within the market. This particular indicator informs the investor of how the market is performing presently rather than in the future. MACD indicators can significantly reduce the investor s risk by assuring that the trade occurs on the right side of the market.
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