Continued from page 1
The 9-Day EMA acts as a signal line or trigger line for
MACD. When
MACD line crosses above
9-Day EMA from below, it indicates that
downtrend is over and a new uptrend is forming. Time to consider bullish strategies. Conversely, when
MACD line drops below its 9-Day EMA, a new downtrend is forming and its time to implement bearish strategies.
THE MACD HISTOGRAM So far, we have covered
most simple form of interpreting
MACD charts. We now look at
MACD histogram. Just as
MACD line is
difference between
12-Day and 26-Day EMA,
MACD histogram is basically
difference between
MACD line and its 9-Day EMA.
So when
MACD line crosses above its 9-Day EMA,
MACD histogram will cross above zero. In order words, a bullish signal is obtained when
MACD histogram crosses above zero, and a bearish signal is obtained when it crosses below zero.
POSITIVE AND NEGATIVE DIVERGENCE
The MACD histogram forms valleys and peaks. Sometimes, multiple peaks are formed, with each subsequent peak becoming lower and lower. These progressively lower peaks constitue what is known as a negative divergence. A negative divergence on
MACD histogram is an indication that
current uptrend might reverse in
near future. This could happen even though
actual stock price seems to be making higher peaks in
chart. Basically,
MACD histogram negative divergence is a warning that
stock might turn down soon.
Similarly,
positive divergence on
MACD histogram predicts
subsequent uptrend. However, sometimes these divergences can create false alarms. If we follow these signals, we could have bought into a downtrend.
As such, I would like to remind you that individual indicators such as
Moving Average Convergence Divergence (MACD) charts should not be used on their own, but rather with one or two additional indicators of different types, in order to confirm any signals and prevent false alarms.
If you would like to know more about
MACD with graphical examples, do visit:
http://www.option-trading-guide.com/macd.html

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