Posted by forex at 8:38 AM
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1. Apply the MACD study to your price chart. Most software programs provide the MACD as a standard indicator that you invoke via a simple menu or button. When added, the MACD appears as a sub-graph below the main price chart.
2. Identify the MACD line itself on the sub-graph, and also its 'signal line.' Two lines fluctuate and intersect frequently on this chart. The signal line is a moving average of the values of the MACD line.
3. Buy into the financial product when the MACD crosses up above its signal line. This signals that the momentum is increasing and prices could rise. Similarly, sell if the MACD crosses below its signal line.
4. Buy into the financial product when the MACD crosses up above the zero level, as identified by a horizontal center line on the graph. This can also signal increasing momentum. Similarly, sell if the MACD crosses below the center line.
5. Compare the recent lows in the MACD with the recent lows in the prices. If prices fall to a new low but the MACD instead makes a higher low, this is called 'divergence.' It indicates that momentum is not following the price action, and is in fact rising even as prices fall. Many traders take this as a signal to buy with the expectation that prices will soon reverse and head higher.