MACD displays the correlation between a 26-day and 12-day exponential moving average. In addition there is a 9-day exponential moving average (which is the signal or the trigger) line plotted on top.There are three most used ways to trade the MACD
 Crossovers: sell when the MACD falls below its signal line and buy when the MACD rises above it. One could also buy or sell when the MACD goes above or below zero.
 Overbought or oversold areas: if the shorter moving average pulls away dramatically from the longer moving average and the MACD rises it is likely that the price is overextended and will soon return to more realistic levels
 Divergences: the end of the trend may be near when MACD diverges from the price of a currency pair. A bullish divergence occurs when the MACD is making new highs while the price fails to follow. A bearish divergence occurs when the MACD is making new lows while prices fail to follow. These divergences are most significant when they occur at relatively overbought or oversold levels, that is after extended market moves

Illustration of a MACD crossover

Illustration of MACD divergence

Illustration of MACD overbought area and crossover

This entry was posted on Wednesday, March 21st, 2007 at 6:01 am and is filed under Technical Indicators. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.