Understanding MACD (Part 2)

04/29/2008 12:00 am EST

Focus:

Based on yesterday's tip, you may think being a mathematician is necessary to truly understand MACD (Moving Average Convergence / Divergence). Whether you are a mathematician or not is hardly the point. One need not really understand the complexities of the calculations within a MACD, but rather it is only crucial to understand the basics of the math and what the MACD is trying to tell us as technical traders. For that reason, we will not further dissect the math. Instead, let us get to the point; how does a MACD forecast successful trades?

As is the case with trading moving average crosses, buy and sell signals derived from a MACD will come from the crossing of two lines. However, these two lines are not your two EMA lines, rather one is the combined level of the two EMA lines and the second is the signal, or trigger line (the 9-day exponential moving average of the actual MACD itself). The MACD crossing signal line from above would indicate a sell order and conversely the MACD crossing the signal line from below would indicate a buy order.

More in part 3 tomorrow.
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