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Moving Averages Crossover Masterclass Part 1

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BITSTAMP:ETHUSD   Ethereum / U.S. Dollar
Moving Average Convergence Divergence ( MACD )
  • Created by Gerald Appel
  • It was designed in order to reveal changes in the direction, strength, momentum, and duration of a trend in a stock’s price
  • It is a trend-following momentum indicator which shows the relationship between two moving averages of a stock’s price
  • As the name suggests, MACD is all about the convergence and divergence of two moving averages
  • Convergence occurs when the moving averages move towards each other while Divergence occurs when the moving averages move away from each other
  • Three main components of MACD Calculation: MACD line, Signal line, and MACD Histogram

MACD line – Calculated by subtracting 26-day EMA ( Exponential Moving Average ) from 12-day EMA .

Exponential Moving Average ( EMA ) is a type of moving average which places a greater weightage on the recent data points when compared to the past data points, making it react more significantly than a simple moving average .

Signal line – 9-day EMA of the MACD line is called the signal line

Histogram – Histogram is the graphical distance between MACD and the signal line, height used to assess how strong the price is moving in the given direction

There are three main parameters of MACD as a whole:
  • Look-back period of long term EMA to be formulated for MACD
  • Look-back period of short term EMA to be formulated for MACD
  • Look-back period of EMA to be formulated for signal line calculation

There are many ways MACD can be used to formulate trading strategy, out of which we will be discussing two in this post:
1. Centerline Crossover
  • Centerline: Zero lines above and below which the MACD line oscillates, diving the canvas in bullish and bearish regions

  • Bullish Crossover when MACD line moves above zero i.e. 12-EMA crosses up 26-EMA
  • Bearish Crossover when MACD line moves below zero i.e. 12-EMA crosses down 26-EMA

    Signal Generation
  • BUY when MACD crosses up 0 while SELL when MACD crosses down 0

2. Signal line crossover
  • The signal line is 9-day EMA of MACD that means it trails the MACD thereby indicating momentum changes in convergence-divergence

  • Bullish crossover when MACD turns up and crosses above the signal line
  • Bearish crossover when MACD turns down and crosses below the signal line

    Signal Generation
  • BUY when MACD crosses up the signal line and SELL when MACD crosses down the signal line
A lot more interesting things can be done using MACD , about which we'll be talking in the next Masterclass on MACD .
STAY TUNED!
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Comments

Like all indicators, MACD creates both effective signals and false signals; the key to success is to understand how to judge the quality of each signal to help determine if it's likely to lead to profit or is just a head fake. I'd like to see some discussion of what factors go into assessing signal quality, how those factors are affected by the market environment, and what specifically would be the effect of making tweaks to the individual parameters. To me, that would be a true MasterClass, not just a re-telling of what is already known.
+2 Reply
IamDobby gooberpees
@gooberpees, Why don't you do everyone the honour of sharing your thoughts and knowledge and then open them up for discussion, as you are so passionate on the subject.
I would be happy to be involved when you do mate :)
+1 Reply
A lot more interesting things can be done using MACD,
about which we'll be talking in the next Masterclass on MACD.
STAY TUNED!
+2 Reply
IamDobby Mudrex
@Mudrex, Thank you great work as always and thanks for your contribution to the community.
I always look forward to your thoughts and content :)
Reply
Thank you for taking your time to explain MACD. Very detailed.
+1 Reply
If you find the post useful, please like, share, and follow to make sure that you get more information once published.
+1 Reply
good knowledge
Reply
How to improve it's lagging nature?
Reply
V informative and certainly useful....
Reply
Thank you for sharing 🦋😇
Reply
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