Using MACD in CFD Trading
The MACD indicator is one of the most reliable, simplest and widely used technical indicators in existence, and offers both an easy way of looking at a market and its overall market direction as well as simple buy and sell signals.
Developed by Gerald Appel, the MACD (which stands for Moving Average Convergence/Divergence) is essentially a momentum oscillator that measures the direction and strength of the underlying market trend. It does this by measuring the difference (convergence or divergence) between a market's 12-period and 26-period exponential moving averages.
A positive MACD reading indicates that the 12-day EMA is trading above the 26-day EMA. A negative MACD reading indicates that the 12-day EMA is trading below the 26-day EMA. If MACD is positive and rising, then the gap between the 12-day EMA and the 26-day EMA is widening and you should be long only. (The MACD line is the faster of the two indicator lines; the second, slower line, called the signal line, is an average of the fast line.) This indicates that the rate-of-change of the faster moving average is higher than the rate-of-change for the slower moving average. Positive momentum is increasing, indicating a bullish period for the price plot.
If the MACD is negative and declining, then the negative gap between the faster moving average (blue) and the slower moving average (red) is expanding. Downward momentum is accelerating, indicating a bearish period of trading, and you should be short only.
1. Signal-line crossover: A bullish crossover occurs when MACD crosses above its signal line and a bearish crossover occurs when it crosses below the signal line. However, bullish crossovers can take place below the zero line, and bearish crossovers can take place above the zero line. Such signals are less reliable, since they are contrary to the intermediate-term trend (the zero line often corresponds roughly to the market's 50-period moving average). However, bullish crossovers above the zero line and bearish crossovers below the zero line are strong signals. They mean momentum has reversed back into the direction of the intermediate trend and is accelerating. Get on board.
2. Zero-line crossover: MACD zero line crossovers occur when the faster moving average crosses the slower moving average. A bullish zero-line crossover occurs when MACD moves above the zero line and into positive territory. This is a clear indication that momentum has changed from negative to positive, or from bearish to bullish. Similarly, a bearish cross below the zero line indicates that momentum has turned from positive to negative. Both of these are strong signals also but can be tricky to play because there is often a pullback and retest of that zero line. It is usually best to wait for that retest, which often causes the MACD line to pull back toward the zero line, and then enter when the MACD line reverses away from the zero line again.
3. Exits: The most typical exits when entering on a MACD crossover, whether of the signal line or zero line, is simply a reverse crossover in the opposite direction. However, because the MACD is a lagging indicator, waiting for a crossover before exiting often means giving back quite a bit of profits, so it is usually better to use some other signal as an exit, or to use price targets The aim of this article is to show you the importance of education as an educated forex trader is a more profitable trader.
Article Source: FxTradingStock.com
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by: cfdreport
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Date: Thu, 9 Apr 2009
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