MACD a trend following momentum indicator
BY Chris Andreou
|December 16, 2020There are three popular methods traders use the MACD. MACD is short for Moving Average Convergence/divergence and is useful as a tool trader use for identifying over-bought and oversold levels, divergences and buy sell crossover signals.
The MACD is a trend – following momentum indicator
- Momentum, like prices, move in trends.
- The MACD shows the relationship between two moving averages.
- The MACD is the difference between a 26-day and a 12-day moving average.
The aim of the MACD is to apply it to charts to show buy/sell opportunities.
There are three popular ways to use the MACD:
- Crossovers
- Over bought / oversold conditions, and
- Divergences
MACD Crossover
The Basic trading rule is to sell when the MACD falls below its signal.
Where can we use Momentum?
- Currencies,
- Commodities
- Bonds
- Stocks
- Indices
- Precious metals, etc.
MACD Crossover
The Basic trading rule is to sell when the MACD falls below its signal.
Buy Signals occur when the MACD rises above is signal line.
MACD Interpretation
Buy Signals occur when the MACD rises above is signal line; Sell Signals occur when MACD crosses below signal line; Confirmation occurs on cross above the zero line.
MACD Overbought / Oversold
MACD is useful as an overbought / oversold indicator.
This type of MACD analysis is more art than science.
MACD Divergences
- MACD is useful as an indication that an end to the current trend may be near
- Bear market divergences occur when MACD is making new lows while prices fail to make new lows
- Bullish divergences occur when MACD makes new highs while prices fail to make new highs
- Both divergences are most important when they happen at relatively overbought / oversold levels
Bullish divergences occur when MACD makes new highs while prices fail to make new highs.
Bearish divergences occur when MACD makes new lows while prices fail to make new lows.
Conclusion:
Trend following momentum indicator; 3 ways to use the MACD:
- Crossovers
- Overbought / oversold levels
- Divergences
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