What Are The Three Most Common Forms Of MACD Analysis?

I know you came for MACD analysis. And, I will be happy to go over that. But first, a little background information.

The MACD is one of the technical indicators that I like to be able to glance at every time I am reviewing a stock.

The MACD is one of the most common technical indicators, since it is simple to understand. Yet It's advanced enough for seasoned investors.

Not For Determining Trends

The MACD is a lagging indicator. Thus, MACD analysis is used mainly to confirm a trend or a trend reversal.

And not to predict trends.

When I use it, I use it mainly as a tool to further help me decide whether or not to buy a stock. I also look at the basics: price and volume.

Side Note:

Well, that's enough background. I hope you now understand what the purpose of the MACD is. Now, Ill get into exactly what is behind those lines and bars.

The Three Components Of The MACD

Before I get into MACD analysis, I will go over the mathematical formula for how it is formed.

The MACD uses three Exponential Moving Averages.

The ones used are the 12 day, the 26 day, and the 9 day.

If you don't quite get moving averages, you may want to read a detailed description.

But, in a nutshell, moving averages take the previous days' closing prices (a 12 day SMA takes the last 12 days). Then they are averaged out each day. With exponential moving averages, the more recent days are weighed more heavily.

So, behind the scenes, two EMAs are plotted. The first two are the 12 and 26 day ones. The MACD line is basically the difference between these moving averages. If you get this, great.

Your past the hardest part. ☺

But, since this was the hardest part part for me to learn, maybe you'll want to take a few moments for it to sink in. In the mean time, here's a chart that I hope helps.

So, one moving average left, the 9 day. The 9 day EMA is plotted regularly along-side the MACD line. This will usually be the thinner and lighter of the two lines.

Ill get into how to use the MACD for indicators in just a second. But, let me just explain the last component: the bars that fluctuate behind the the two lines. If you got the first part (how the MACD line is the difference between the two moving averages) then you should have no problem with this.

The bars are simply the difference between the MACD line and the nine day moving average.

Congratulations, you now know the inner workings behind one of the most common technical indicators.

Using The MACD For Stock Analysis

Now for what you came for...

MACD analysis.

Firstly, and most commonly, the MACD line crossing over the 9 day EMA is considered a signal. Yes, this is the most common. Because of this, you will get many false indicators. So, use it sparingly and don't weigh it too heavily.

The second most common signal is the crossover of the MACD line over the zero point. This is used more commonly for MACD analysis since it doesn't have as many false indicators. In case you don't quite grasp the concept, the crossover represents the crossover of the 12 day and the 26 day EMAs.

Those are the two most basic and most common ways of MACD analysis.

Divergences

Here is something that is a little more advanced.

With this, you will look at the recent lows of a stock and compare them to the recent lows of the MACD line. With this form of MACD analysis, you don't have to worry about the 9 day moving average line.

This is the divergence part of Moving Average Convergence Divergence. A negative divergence is a bearish sign. And a positive divergence is a bullish sign.

Since this can be applied as either a bearish signal or a bullish signal, I will explain it as a bearish signal. And for a bullish signal it would be the same, except opposite.

Lets say you bought a stock and this stock has been in an upward trend for a few months. This technique, divergence, will help you spot when the trend is about to end.

Now, lets say this stock that you bought is making higher highs. This is a bullish signal.

That's fine. But, you may want a second opinion.

So, you turn to the...

MACD

If the MACD is making lower highs this is a sign of a trend reversal, where the stock is likely to start going down. And you will want to either get out or short the stock.

This is not a common occurrence. Because of this, when you do see it, pay extra attention, because it is a strong indicator.

Conclusion

I wouldn't blame you if you don't understand every little detail that I just went over.

If you feel like you've missed something, my advice to you...

go over it again.

With MACD analysis, reading about it is only half the battle. You learn so much more when you actually use it for yourself.

So, if you haven't done so yet, start using the MACD every time you research a stock and with practice you will become a master of MACD analysis.