The MACD is a trend following
momentum indicator that shows the relationship between three moving averages
of prices.
This method can be used for any time frame. It could be 5 minute bars, 15
minutes bars or daily bars. Many traders will also trade in multiple time
frames using a longer time frame for trend, and the shorter period for entry
and exit.
The MACD is the difference between a 26-day and 12-day exponential moving
average. A 9 period exponential moving average, called the “signal” (or
“trigger”) line is plotted on top of the MACD to show buy/sell
opportunities. On the charts below, the MACD line is the green colored
line, and the trailing, slower moving line is the signal line. Some
technical analysis programs will show the MACD as a histogram bar.
There are three popular ways to use the MACD: crossovers,
overbought/oversold conditions, and divergences.
The most common use is as a crossover method. Using this interpretation,
the trading rule is to sell when the MACD falls below its signal line.
Similarly, a buy signal occurs when the MACD rises above its signal line. It
is also popular to buy/sell when the MACD goes above/below zero.
Some traders will use MACD as an overbought and oversold indicator. When
using the indicator in this manner, when the shorter moving average pulls
away dramatically from the longer moving average (i.e., the MACD rises), it
is likely that the security price is overextending and will soon return to
more realistic levels. MACD overbought and oversold conditions vary from
security to security.
The other way some traders use MACD is to spot divergences from an
anticipated movement. Since there are no indicators or patterns that work
all the time, reactions against the anticipated move can signal a major
move. A bearish divergence occurs when the MACD is making new lows while
prices fail to reach new lows. A bullish divergence occurs when the MACD is
making new highs while prices fail to reach new highs. Both of these
divergences are most significant when they occur at relatively
overbought/oversold levels.
I like to combine this indicator with some kind of breakout pattern.
Let’s look at Efficient Networks,
EFNT.
We use the MACD indicator for our short term day trading using 60 minute bar
charts.
Due to the time frame, the MACD indicator seems to work better when combined
with some breakout method. This could be a 10 bar, 20 bar or a 2 day
breakout of highs.
I like to see a stock moving in my direction.
EFNT was cut in half from the July 17 high to the low on August 3. Trying
to catch a falling knife would have been dangerous for a trader.
Now EFNT may have formed a base over the past couple of days.
EFNT has flashed a MACD Buy signal and it also broke the high of the past
three days.
I would Buy EFNT on any unchanged or up opening.
I would place a stop at 57 �.
Do not take the trade if EFNT gaps down.
