The Hindu Business Line : Tech Tools

Should we use the simple moving average or the exponential moving average in MACD? For the short-term as well as for the long-term should the daily MACD or weekly MACD be used?

What action should be taken if daily MACD shows "sell" signal and weekly MACD shows "buy" signal? Atul Madhursinh Ramaiya.

Moving averages that are most commonly used to calculate the MACD are simple moving averages. But using exponential moving averages will definitely improve the effectiveness of your MACD, as these averages give greater weightage to the most recent trading day as opposed to simple moving averages that give equal weightage to all days.

It is not possible to use just the daily or weekly MACD for investing for both the short term as well as the long term. For short-term trading purpose, the MACD on the daily chart can be used. For analysing the investments for the long term, read the MACD on the weekly or monthly charts.

It is a common occurrence for the daily and weekly MACDs to give conflicting signals. If you are an investor, then sell signals in daily MACD should be ignored and you should continue to hold the stock as long as the weekly MACD is in a buy mode. If you have bought the stock for short-term trading purposes, then exit as soon as the sell signal is generated on the daily MACD, even if the weekly MACD continues to give a buy.

In other words, traders should follow MACD on daily or intra-day charts while the investors need to look at the MACD on the weekly charts.

As per moving average theory, whenever the moving average line cuts the actual price line from the bottom, it is a signal to sell. Conversely, whenever the moving average line cuts the actual price line from above, it's the time to buy. On July 3, the Sensex was at 10695 and on September 22 the Sensex was at 12236.

The 59-day moving average of the Sensex was at 10692 on July 11 and at 11210 on September 22. As per this, the moving average line is yet to cut the actual Sensex line from above. Hence, can we conclude that the market is yet to give you a buy signal? P. Santharam.

The moving average theory is to be applied on the moving average line that is plotted by calculating the average over a certain period. This theory cannot be applied on certain points in time alone.

If we consider the period that you have taken into consideration — between July 3 and September 22 — the 59-day moving average line cut the Sensex line from above and moved below it on July 27 when the Sensex was at 10741. This average has remained below the Sensex since then.

This means that as per the moving average theory, taking only the 59-day moving average into consideration, the Sensex gave a buy signal on July 27.

Certain indicators give buy and sell signals faster than others. At times, it has been observed, that one indicator does not give a buy signal, while some other indicator might have already suggested a buy.

That is the reason why it is advocated that more than one indicator should be used while analysing a chart.