MACD "Moving Average Convergence/Divergence"
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-period and 12-period 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 will also use MACD combined with the breaking of support. Support can be
defined differently depending on the strategy. I like using the lowest low
and highest high of the last 20 bars depending on my time frame or a change
in moving average direction.
Lets look at Sun Microsystems, (NASDAQ: SUNW)
SUNW has been one of the markets strongest stocks.
While most stocks were hit very had over the past week, I like looking for
the stronger stocks that declined the least. During any retracement or
change in market direction, these stocks should lead the market higher.
Using the MACD method in SUNW has produced some excellent trading signals.
It has signaled turns and kept a trader in for nice gains.
Once again, the MACD is turning up and with any rise in the morning will be
signaling a new Buy signal. Know how a technical indicator will work with
price and visualizing how it should perform is critical in trading success.
A rise in SUNW above 90 � should confirm the turn around and new
signal.
The way to play this on a Day Trade entry is to Buy SUNW 90 � when
it gets there or by using a Buy Stop 90 � to enter long.
SUNW should continue higher from that confirmed change in direction and I
would place a stop at 88 �.
If it never gets there, DO NOT TAKE THE TRADE. We saw dramatically last
week how waiting for confirmation helps to keep a trader out of bad trades,
