MACD(Trend and momentum indicator)Moving average convergence and divergence indicator.
This indicator involves pulling two momentum lines.The MACD line is the difference between two exponential moving averages.The signal line or trigger line which is an exponential moving average of the difference.If MACD and trigger line crossess then this is taken as a signal that change in trend is likely.
The MACD is a specefic instance of value oscillator and is typically used on the closing prices of the forex market to detect price trends.When the MACD increases, the prices are trending higher and when MACD decreases the prices are trending lower.
The MACD indicator relies primarily on plotting two moving average lines typically 12 and 26 days. EMA's plot the rate of change between the two.The line used to denote the rate of change is called the signal line.The sinal line is rising upwards denote that the momentum is bullish and downwards indicates that the momentum is bearish. Default 12/26/9 Daily 5/34/5 trend 8/18/9.
If you are trading a daily chart you would be looking at the MACD on the weekly.As long as the signal line remains above or below the MACD line on the next higher time frame, you know that the trend is still in place.8/18/9 value is good to find out trend like this.
The centred oscillators fluctuate above or below a central point or line.These oscillators are good for identifying the strength or weakness or direction of momentum behind a securities move.
Momentum is positive (bullish) when a centred oscillator is trading above its centre line and negative (bearish) when the oscillator is trading below its centreline.
Positive and negative divergence signalls trend change.When MACD turns and trades above its 9 day EMA(MACD bullish cross over) positive divergence is confirmed.
MACD bullish signals. 1) Positive divergence. 2)Bullish moving average cross over. 3)Bullish centreline cross over. MACD beraish signals 1) Negative divergence. 2)Bearish moving average cross over. 3)Bearish centreline cross over.
Sometimes a security can be in a strong uptrend and MACD will remain above its trigger line for a sustained period of time.When a bearish moving average cross over occured, it signalled the upside momentum was slowing.This slowing momentum should have served as an alert to monitor technical situation for further clues of weakness(Signal).Weakness was soon confirmed when the security broke its uptrend line and MACD continued its decline and moved below zero(Confirmation).
The centreline crossover can act as an independent signal or confirm a prior signal such as moving average cross over or negative divergences.Once MACD crossess into negative teritory momentum at least for short term has turned bearish.
Condition 1 The significance of the centreline cross over will depend on the previous movements of MACD as well.If the MACD is positive for many weeks, begins to trend down and then crossess into negative territory BEARISH. Condition 2 MACD has been negative for a few months, breaks above '0' line and breaks below CORRECTION.
Confirmation using traditional trend analysis. The change in trend, the price makes higher highs and higher lows or lower highs and lower lows.MACD incorporates aspects of trend and momentum.MACD divergences can be key factors in predicting a trend change.Negative divergence, the bullish momentum is waning.There could be a potential change in trend from bullsish to bearish.This can serve as an alert to traders to take some profits in long position or for aggressive traders to consider initiating a short position.
MACD draw backs.Lagging indicator, Not good for identifying overbought or oversold condition.
HISTOGRAM. MACD histogram represents the difference between MACD and the 9 day EMA of MACD which can also to be referred to as the signal or trigger line.The plot of this difference is presented as a histogram, making cntreline cross overs and divergences, easily identifiable.The centreline cross over for MACD histogram is same as moving average cross over for MACD.
Sharp increases in the MACD histogram indicates that MACD is rising faster than its 9 day EMA and the bullish momentum is strengthening.Sharp declines in the MACD histogram indicates that MACD is falling faster than its 9 day EMA and bearish momentum is increasing.
Signals. Bullish signal. Positive divergence plus bullish centreline crossover Bearish signal .Negative divergene plus a bearish centreline cross over.
DIVERGENCES. Slant divergence and Peak-tough divergence. Peak-trough divergence usually cover a long time frame than slant divergences.On a daily chart a peak-trough divergence can cover a timeframe as short as two weeks or as long as several months.Short and shallow divergences can lead to false signals and whipsaws. Peak and trough divergences are a bit more reliable than slant divergences.Shorter and faster moving averages may be required for weekly and monthly charts.Once the broad trend has been determined, daily charts can be used to time entry and exit strategies.
Establish long term trend.Then only short term signals that agree with the major trend would be considered.eg 1) Long term trend bullish. Negative divergences with bearish centreline cross overs would be considerd valid. 2)Long term trend bearish.Positive divergences with bullish centreline cross over would be considered valid.
DRAWBACK. It is an indicator of an indicator.Daily signal that agree with the weekly signal.Then there will be fewer daily signals.You are armed of trading with longer trend and not against it.Be careful of small and shallow divergences.