Understanding MACD (Part 4)

05/01/2008 12:00 am EST


Moving on with MACD, look at the graphic below:

Very rarely does the histogram reach the point of a cross (two lines crossing and no line plotted on the histogram) and then plot lines in the same direction as the previous section of the histogram. In other words, if there is a legitimate cross, the histogram should begin indicating a new price direction.

Consider the following strategy: watch the histogram for points where no lines or very small lines are drawn (indicating a cross), then look for strong lines up or down from that point. If after a cross, the histogram begins to plot lines at a sharp angle up or down, such should be considered an indication of a strong directional change in the market.

If the MACD crosses, but the histogram plots a series of lines at a weak angle, perhaps the market it momentarily retracing, but overall trends may not be changing.

More in part 5 tomorrow.
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