Excerpt from: Day trading newsletter Issue No. 003
Day trading with the MACD
From: Archie
Hello ... could you explain the MACD to me? How to use it?
I read about it but don't quite get it.
Thanks,
Archie
~~~Christopher's Response~~~
Archie, here are the basics...
The MACD (Moving Average Convergence/Divergence) is a
trend following momentum indicator that shows the
relationship between two moving averages of prices.
The MACD is the difference between a 26-day and 12-day
exponential moving average. A 9-day exponential moving
average, called the "signal" (or trigger) line is
plotted on top of the MACD to show buy/sell opportunities.
The MACD proves most effective in wide-swinging trading
markets. There are three popular ways to use the MACD:
1.crossovers
2.overbought/oversold conditions
3.divergences.
Crossovers
The basic MACD trading rule is to sell when the MACD falls
below its signal line. Similarly, a buy signal occurs when
the MACD rises above it's signal line. It is also popular
to buy/sell when the MACD goes above/below zero.
Overbought/Oversold Conditions
The MACD is also useful as an overbought/oversold indicator.
When the shorter moving average pulls away dramatically from
the longer moving average (i.e., the MACD rises), it is likely
that the security price is overextending and will soon return
to more realistic levels.
Divergences
A indication that an end to the current trend may be near
occurs when the MACD diverges from the security. A bearish
divergence occurs when the MACD is making new lows while
prices fail to reach new lows. A bullish divergence occurs
when the MACD is making new highs while prices fail to
reach new highs. Both of these divergences are most significant
when they occur at relatively overbought/oversold levels.
Just let me know if any of this is confusing to you Archie.