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What is an oscillator indicator?
Oscillators are technical indicators that change between two extremes. The indicator oscillates in range and signals that a security is overbought or oversold based on the distance of the price point from the high or low price indicator.
Oscillators can transmit buy or sell signals by crossing or diverging. The crossing is the point at which the oscillator intersects the upper or lower boundary. You can use crossovers to predict the short-term performance of assets and use buy and sell signals to time the best trades. When the price trend and the direction of movement of the indicator diverge, it indicates that the price trend may be weakening.
What is a smoothed moving average (MACD)?
Smooth Similarities and Similarities Moving Average (MACD) Oscillator is a momentum indicator that shows the relationship between two sets of moving averages.
Subtract the long-term EMA from the short-term EMA to get the MACD indicator that reflects the trend and momentum. The indicator consists of three elements: the MACD line (which measures the distance between two moving averages), the signal line (which identifies changes in price momentum), and the histogram (which represents the difference between the MACD and the signal line).
Typically, traders calculate the MACD line with 12 cycles of EMA minus 26 cycles of EMA and plot it on the chart. The 9-cycle EMA (called signal line) of the classic MACD line is then superimposed on top, which helps to obtain a more accurate signal for buying and selling. Typically, the histogram is displayed behind these two lines.
The sudden rise in MACD, where the shorter moving average rises quickly above the long-term EMA, suggests that the stock is overbought and may fall back to normal levels. And vice versa.
Who invented the MACD indicator?
The MACD indicator was invented by professional money manager Gerald Appel in the 1970 s. Appel has more than 35 years of experience in investment management. In addition to his professional achievements, his academic research in financial services is also outstanding, co-authoring 15 books and multiple academic articles. He focuses on the field of investment strategy and is a recognized expert in technical analysis.
In 1986, financial market analyst Thomas Aspray added histograms to MACD to predict MACD and signal line crossings. The histogram is an indicator of material changes in the price of the underlying security.
What is the role of the MACD indicator?
The MACD indicator is favored by traders for its simple and reliable features. Another popular reason is that it can reflect the strength of the trend, a signal indicating the end of the upward/downward trend (market reversal). It is already a valuable asset for traders to understand the strength of the indicator signals and the direction of the market.
The MACD indicator accurately reflects what happens in real time in the market. If you compare it with other technical analysis tools (such as moving average indicators), you will find that signals are usually delayed and sometimes market sentiment changes before a clear signal is generated.
How to use the MACD indicator?
The MACD indicator has three signal types, each of which represents different information, as follows:(1) the intersection of the signal line and the MACD line;(2) the difference between the MACD indicator and the price;(3) the intersection of the MACD line with the zero line (centerline crossing).
(1) If the MACD line falls below the signal line, it indicates a bearish trend, which may be a sell signal. Similarly, if the MACD exceeds the signal line, I .e. a bullish signal, it can be used as a good buying opportunity. The MACD histogram oscillates above and below the zero line, representing the positional relationship between the MACD line and the signal line, indicating the strength of the trend.
(2) When the stock price deviates from MACD, it may indicate the end of this trend. If the price touches a new high, but the MACD has not broken high, then this is a bearish divergence, indicating that the uptrend is about to end. If the asset price hits a new low and the MACD has not broken low, it indicates a bullish divergence, indicating that the downward trend is about to stop.
(3) Centerline crossing is the most common MACD signal. A bullish mid-line cross (buy signal) occurs when the MACD line crosses the zero line (in other words, turns from negative to positive). This happens when the 12-cycle EMA moves above the 26-cycle EMA. Conversely, a bearish mid-line cross is when the MACD line falls below the zero line, which is a sell signal.
