Moving Average Convergence-Divergence

Traders· fondly refer to the MACD as "the mac-dee." The acronym stands for "moving average convergence-divergence" (say that fast three times!). Multifaceted, the MACD not only acts as an indicator, it also plays the role of an oscillator. Developed by Gerald Appel, publisher of Systems and Forecasts, the MACD is a trend-following momentum indicator/oscillator that illustrates the relationship between the 26-day and 12-day exponential moving averages of an equity's price pattern. A 9-day exponential moving average, referred to as the "signal line," overlays the MACD and indicates buy/sell setups.
Since the MACD is a "lagging" indicator, meaning it delivers signals from information that's already taken place (the S&P and Nasdaq 100 futures are "leading" indicators), it is best used in strongly rending markets. Because the traditional MACD usually arrives a bit late to the party (read: trend reversal), short-term traders may leave money on the table by adhering strictly to its signals. To obtain faster signals, I recommend using the MACD histogram, available on most charting programs. The MACD Histogram (MACD-H) represents the difference between the MACD and its 9-day exponential MA. Don't worry if your brain tangles over that one. Your charting program understands it! Just insert it on your chart, above the volume indicator. The MACD-H will snake above and below its zero line, moving into positive (above zero) or negative (below zero) territory.
MACD-H signals are:
Crossovers. Buy signal (bullish) equals when the MACD-H rises above its zero line. Sell signal (bearish) equals when the MACD-H tumbles below the zero line.
Overbought/oversold indicators. As an overbought/oversold oscillator, when the MACD-H rises to the top of its scale and resembles a majestic mountain, the stock may. be overbought and ready to pullback. When the MACD-H edges below the zero line and digs a deep scoop to the downside, the stock is oversold. WQen the histogram bars shorten and edge back up, the stock should be preparing to bounce.Fun to do: Use a MACD-H on a weekly chart to generate a long-term buy/sell signal. Then, go to a daily chart of the same stock, and only trade in the direction of that longer-term signal.

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