In stock market moving average (MA) is used to determine the trend of the market or a security. Upward trend is confirmed when short term moving average crosses above a longer term moving average and downward trend is recognized when short term moving average breaches below longer term moving average. For example if 50 MA crosses above 100 MA it is considered as up trend. If 50 MA falls below 100 MA trend is bearish.
Simple moving average (SMA), Cumulative moving average (CMA), Weighted moving average (WMA) and Exponential moving average (EMA) are important types of Moving averages.Modified moving average (MMA) or Running moving average (RMA), or Smoothed moving average is also considered as a moving average.
As I said above Moving averages allow traders to recognize and confirm the trend. Thus by identifying the trend he can achieve success in his trade.
Moving Average Convergence Divergence (MACD)
MACD or moving average convergence divergence was developed by Gerald Appel in late 1970's. It is also a simplest and useful technical indicator used in stock market. It is based on exponential moving average. In a chart it is a collection of three signals namely MACD line, Signal line and the divergence (difference) line. These signals are calculated from historical prices of a financial instrument (indice or stock).Most people use closing prices to calculate MACD.
The first signal 'MACD line' is the difference between a short term (fast) exponential moving average , and a longer term (slow) exponential moving average. In a chart MACD line is changing over time along with 'signal line'. MACD histogram time series is an oscillator which shows the divergence between MACD line and Signal line.
The standard setting for MACD used in stock market is 12,26 and 9. MACD 3,10,16 is also used by some traders.
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