January 11, 2018
In technical analysis, MACD is used to generate signals as well as to confirm a trend.
One of the most used settings for MACD is 12 for EMA1 (fast moving average), 26 for EMA2 (slow moving average) and 9 for signal line. The signal line is used to smooth MACD and generate signals on its crossovers with MACD. Still this setting is not always fit to trading needs of all traders; therefore, the setting could vary depending on a trader’s personal trading style. The difference between the MACD and signal line forms the Histogram.
There are three basic ways of using this indicator.
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1. Look for MACD crossovers with zero line
Positive MACD confirms an up-trend and negative MACD confirms down-trend. Thus, when this indicator drops below zero line it could be considered as a signal to sell short and when it raises above zero line it could be considered as a signal to buy long.
2. Trade MACD and Signal Line crossovers
This is the same as to look for MACD Histogram and zero line crossovers. The technical analysis says that when MACD crosses signal line on its way down it signals selling and when it crosses signal line on its way up it signals buying.
3. Define moments of divergence between price and MACD
In particular, a buy signal could be generated when price makes new low, yet MACD stays above its previous lowest point. Controversially, a sell signal could be generated when price makes new high, yet MACD stays below its previously hit high level.
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Despite the fact that MACD is one of the oldest studies in technical analysis, as many other studies it generates fake signals. Furthermore, it is recommended to use it in junction with other indicators. Since MACD is price based indicator it could be a good choice to use volume based indicators to complete a trading system that uses MACD analysis.
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About the author
Find out more about Viktor Ka technical analysis of different indicators applied to the S&P 500, NASDAQ 100 and DJI to create trading systems for stocks and options trading.
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