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1. Launch your trading platform and apply the MACD study to any chart you desire to trade. Almost all major charting programs include the MACD tool, including most web-based brokers. For short-term investors, the chart may be a daily chart of a given stock or popular index. Day traders may apply the MACD to a 5-minute chart or any intraday time-frame that suits their style.
2. Customize the MACD settings, if desired. By default, most MACD indicators are set to show the difference between a 26-period and 12-period exponential moving average (EMA). The MACD's own EMA is often 9-period. While these variables can be set to anything, it is best to compare different settings based on your experience and trading style before settling into a permanent configuration. Once chosen, stick with these settings to become used to the MACD patterns created by your specific configuration.
3. Observe how the MACD line reacts to price movement and ask yourself key questions that inform price prediction. The secret to successful trading using any oscillator is to acquire a personal library of pattern observations. When these patterns repeat time and time again, always ask yourself the same questions and base your trading idea on those answers.
4. Sell, or be careful about buying, if price makes a new short-term high but the MACD makes a lower high. This is called bearish divergence and is one of the most powerful implications offered by the MACD. Studying price alone, a trader may assume that because price is rising, there is strong buying behavior present in the market. In reality, it may be the last push of a rally before a notable decline. MACD divergences often indicate this likelihood.
5. Buy, or be careful about selling, if a stock makes a new price low while the MACD is rising. This is bullish divergence and suggests a positive turnaround is coming.
6. When MACD confirms price action by making a new high along with a new price high, or the equivalent pattern for price lows, consider the trend strong and be careful about any counter-trend notions.