Posted by forex at 3:46 AM
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1. Watch for divergence. The most potent use for MACD is to spot divergences in price action. A divergence occurs when the trend in the MACD and actual price begin to move in opposite directions. For example, if a down-trending stock makes a new low in price, but while MACD does not reach new lows and actually moves upward, this is a positive divergence and suggests a buying opportunity. The opposite would be a negative divergence and suggests a chance to sell.
2. Spot centerline crossovers. The centerline, or zero-line, is the place where the difference between the fast and slow moving-average lines is nil. When the MACD lines move from negative to positive through the centerline, this is a bullish indication. A move from positive to negative suggests momentum has shifted and indicates continued weakness in price.
3. Confirm divergences with moving-average crossovers. A moving-average crossover is similar to a centerline crossover except that it occurs when the fast-moving line crosses over the slower-moving line. Because this can happen frequently, it is not considered a reliable indicator on its own. But, such crossovers are important in confirming positive and negative divergences. For example, a bullish moving average crossover occurring after MACD indicates a positive divergence is considered a reliable indication that a positive change in trend is about to occur.