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http://www.atradersuniverse.com/macd.html MACD technical is a powerful tool that can sometimes be hard to understand and use effectively. What if there was a way you could use the various components of MACD technical to your advantage, rather than using just the one method, that can see you whipsawed in and out of trades with monotonous regularity. The more powerful uses of MACD are often overlooked by inexperienced traders, but it's these other uses of MACD that can add a very dynamic and powerful tool to your tool box. Experienced traders will always use MACD in it's dynamic form, and will also use it in conjunction with other tools such as trend lines, support and resistance, volume and so on. MACD stands for Moving Average Convergence Divergence and was developed by Gerald Appel. MACD uses moving averages (default being 26 and 12) which are lagging indicators, but these lagging indicators are turned into a momentum oscillating indicator by subtracting the longer moving average from the the shorter moving average. The result is the blue line in the top chart below. The red line is the the 9 day, exponential moving average of the blue line. (In the top window, the black line is the 26 day MA and the white line is the 12 day MA) The red and green graphs are actually what is called the histogram, and is a visual representation of the distance between the blue and red lines. This can also be used quite effectively. The theory being that when the blue line crosses the red line to the up side, it is bullish. When the blue line crosses the red line to the downside it is bearish. But there is a big problem with this theory on it's own as you can see from the bottom chart. It is very common to find crossovers happening quite regularly in a
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sideways market, and the buy and sell signals will see you whipsawed in and out of the market with losses. Unfortunately, this negative side of MACD will often scare traders off from using MACD in a way that gets better results. The other dynamics to MACD are called divergence, and utilizing the zero line in conjunction with support and resistance. Divergence MACD is split into two parts, positive divergence and negative divergence, and it is basically a visual representation of a weakening in price coupled with increasing strength in MACD, or a weakening in MACD coupled with increasing prices. There are two ways of spotting divergence and that is with the MACD line itself and/or the histogram. The other dynamic is to use the zero line, or what it sometimes called the waterline, as a way of confirming a bullish or bearish move with some form of support and resistance in price, and usually this follows a divergence signal. If you’re interested in getting more free content and information, just access the Macd Technical & Divergence Macd page. Cheers, A Traders Universe