13. MACD and Bollinger Bands
You already know moving averages and momentum. These two indicators are built on exactly those ideas.
13.1 MACD – Moving Average Convergence Divergence
Developed by Gerald Appel in the late 1970s. Don’t let the long name scare you.
- MACD line = 12-period EMA minus 26-period EMA. When the short average pulls away above the long one, momentum is up.
- Signal line = 9-period EMA of the MACD line. A slower version.
- Histogram = the gap between the two lines, drawn as bars.
How traders read it:
- MACD crosses above the signal line → momentum turning up.
- MACD crosses below the signal line → momentum turning down.
- MACD above zero → the short-term average is above the long-term one – an uptrend bias.
- Histogram shrinking → the move is losing speed.
Like all moving-average tools, MACD is slow and gives false signals in sideways markets.
13.2 Bollinger Bands – volatility made visible
Created by John Bollinger in the 1980s.
- Middle band = 20-period SMA.
- Upper band = middle + 2 standard deviations.
- Lower band = middle − 2 standard deviations.
"Standard deviation" simply measures how much prices are spreading out. So:
- Bands wide apart = the market is volatile, moving a lot.
- Bands squeezed together = the market is quiet.
A pressure cooker on the stove looks calm for a while. Pressure is quietly building inside. Then – whistle!
A Bollinger squeeze is that quiet period. Low volatility tends to be followed by high volatility. The squeeze does not tell you the direction of the whistle – only that one is likely coming. Price breaking out of the squeeze shows the direction.
How traders use the bands:
- Squeeze → prepare for a bigger move; trade the breakout direction.
- Walking the band → in strong trends, price can hug the upper (or lower) band for many candles. That is strength, not a reason to sell.
- In ranges → touches of the outer bands often turn back towards the middle.
Indicators are calculated from price. They can never know more than price. Isliye unhe "helpers" samjho, "bosses" nahi. One helper for trend (moving average) and one for momentum (RSI or MACD) is plenty.
A cross above the signal line shows short-term momentum improving.
A squeeze signals low volatility, which tends to be followed by expansion. The breakout shows the direction.
- MACD (Appel) = difference between 12 and 26 EMAs, with a 9-period signal line. Crosses and zero-line position show momentum and trend bias.
- Bollinger Bands (Bollinger) = 20-SMA with bands at 2 standard deviations. They show volatility.
- Squeezes often come before big moves. In strong trends, price can walk the band.
- Indicators are helpers, not bosses. Keep the chart simple.
- Ek line mein: Indicators helper hain, boss nahi – ek trend ke liye, ek momentum ke liye, bas itna kaafi hai.