The MACD is a moving average oscillator that shows potential overbought/oversold phases of market fluctuation. The MACD is a calculation of two moving averages of the underlying price/indicator.
Buy/Sell interpretations may be derived from crossovers. Overbought/oversold levels of the MACD and divergences between MACD and actual price.
- MACD has in its base Moving Averages.
- It calculates the difference between the two moving averages at any time
- Standard indicator settings for MACD (12, 26, 9) are used in many trading systems
- MACD line is created when longer Moving Average is subtracted from shorter Moving Average.
- MACD line and trigger line crossover outperforms EMAs crossover. Besides being early on crossovers MACD also is able to display where the chart EMAs have crossed:
- When MACD (12, 26, 9) flips over its zero line. If indicates that 12 EMA and 26 EMA on the chart have crossed.
- While Sellers may seem to be dominating the market at the moment and price continues to trend down. There already might be signals for an overall weakening of Sellers power.
- MACD doesn’t confirm that and instead registers a Higher Low. Signaling that Sellers are running out of steam and a trend change is on its way. Opposite will be true for Buyers.
- When MACD line crosses Signal line (top or bottom) to evaluate buy or sell.
- Another entry strategy is to find 2 most recent swings high or low on the chart and draw a trend line trough them. Then set an Entry order on the breakout of that trend line.
- MACD divergence trading method used not only to predict trend turning points, but also for trend confirmation.