The Macd (Moving Average Convergence/Divergence) is a trend following momentum indicator that shows the relationship between two moving averages of prices.
It is the difference between a 26-day and 12-day exponential moving average. A 9-day exponential moving average, called the "signal" (or trigger) line is plotted on top of the indicator to show buy/sell opportunities.
The Macd proves most effective in wide-swinging trading markets. There are three popular ways to use it:
1.crossovers
2.overbought/oversold conditions
3.divergences.
Macd Crossovers
The basic trading rule is to sell when the indicator falls below its signal line. Similarly, a buy signal occurs when it rises above it's signal line. It is also popular to buy/sell when it goes above/below zero.
Macd Overbought/Oversold Conditions
The indicator is also useful as an overbought/oversold indicator. When the shorter moving average pulls away dramatically from the longer moving average (i.e., it rises), it is likely that the security price is overextending and will soon return to more realistic levels. Overbought and oversold conditions vary from security to security.
Macd Divergences
An indication that an end to the current trend may be near occurs when the indicator diverges from the security. A bearish divergence occurs when it is making new lows while prices fail to reach new lows. A bullish divergence occurs when it is making new highs while prices fail to reach new highs. Both of these divergences are most significant when they occur at relatively overbought/oversold levels.
