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Wednesday, April 22, 2009

Trading the Market with MACD

Moving Average Convergence/Divergence or MACD are simple yet effective indicators for generating buy and sell signals and to understand trend changes. MACD simply compares a long-term and a short-term exponential moving average to identify existing market trend.

MACD generates bullish signals when one of the following scenarios is satisfied.
  1. Bullish Crossover – occurs when MACD crosses the trigger line (9-day EMA of MACD) from below. Generally when MACD is above trigger line, market is considered bullish and when MACD is below trigger line, market is considered bearish.
  2. Bullish Centerline Crossover – occurs when MACD crosses its center line (zero) from below. This shows that the momentum is changed from bearish to bullish.
  3. Positive divergence – occurs when MACD makes new highs but the stock fail to do so or when security makes new lows but MACD makes higher lows. This shows that the present trend is losing momentum and a trend change is possible. Divergences are least common but most reliable signals.

MACD generates bearish signals when one of the following scenarios is satisfied.
  1. Bearish Crossover – occurs when MACD crosses the trigger line from above.
  2. Bearish Centerline Crossover – occurs when MACD crosses its center line from above. Indicates change of momentum from bullish to bearish.
  3. Negative divergence – occurs when MACD makes new lows but the security fail to do so or when security makes new highs but MACD makes lower highs.
In addition to these signals rapid rise or fall in MACD can also used to generate signals. Rapid rise in MACD indicates overbought conditions and possible correction; and rapid fall in MACD indicates oversold conditions demanding correction.

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posted by NobleTrading at 8:56 AM

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