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How does the MACD help investors?

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Quick Answer

The Moving Average Convergence-Divergence indicator helps investors determine the appropriate time to buy or sell securities by signaling when securities or indices are oversold or overbought. This indicator is useful for investors trading in non-trending markets, according to Fidelity Investments.

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Full Answer

The Moving Average Convergence-Divergence, or MACD, indicator generates buy and sell signals using two lines that fluctuate around the zero line, states Fidelity Investments. When the MACD line is above the zero line in positive territory, it suggests that the securities market is overbought. Since an overbought market is unsustainable, investors wait for an appropriate time to make call contracts. Investors sell their securities when a crossover between the MACD and the signal line occurs. On the other hand, investors buy securities when a crossover occurs below the zero line in negative territory.

Investors also use the MACD to confirm the direction of a trend in the securities and indices market, explains Fidelity Investments. When the signal line crosses the zero line towards positive territory, it means that most investors are purchasing the securities of the company in question. However, investors only confirm a trend when the MACD and signal lines reach the extreme positive or negative territories. Investors also use the MACD to confirm the validity of strategies developed using other indicators.

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