MACD "Moving Average Convergence/Divergence"
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-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.
Let's look at Corel Corp. (NASDAQ: CORL)
CORL is a good example of MACD helping to keep a trader in good trades by using MACD in the traditional manner of Buying when the histogram goes above the signal line and selling when the histogram goes below the signal line.
Look at the signals generated this past month.
Today, the MACD gave a new Buy signal.
I would Buy CORL.
I would place a stop 10 11/16 below today's low.
