Some MACD examples

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In order to use any indicator well, you MUST understand exactly what it is telling you. Just because the momentum in the histogram looks like it is rising does not mean the stock price is rising.

I found this to be true also when using MACD to visually “predict” whether an Index is rising or falling.

So rather than me waffle too much, here is a good link:

http://www.mytechnicalanalyst.com/e_article000431657.cfm?x=b11,0,w

The last sentence of the 3rd Paragraph says:

“Keep in mind momentum does not always refer to advancing prices as a stock dropping could be accelerating downward.”

The entire article should be read and re-read until you understand the construction etc.

You MUST be able to tell the difference between the MACD line and the SIGNAL line.

The “MA” part of “MACD” is Moving Average bit. In a 26-12-9 construction we have as follows:

The “26″ is the “longer” moving average - an average of the closing price over the last 26 trading periods (hours, days, weeks etc).

The “12″ is the “shorter” moving average - an average of the closing price over the last 12 trading periods.

The idea is that one responds to price movements more quickly than the other. Thus we get a picture of what is changing within the trend. - speeding up or slowing. The MACD line is the FASTER of the 2 lines.

The other line is the SIGNAL line, which is a 9-day MA of the MACD line (A moving average of a moving average!)

Now - here is the answer to your question:

” A rising MACD line represents positive momentum and a declining line represents negative momentum.”

So while the MACD is rising, it is telling us how fast prices are rising = momentum.

THE MACD CAN BE FALLING while the price continues to rise … how can this be? (And this is the trap I fell into before I realised the answer too.)

MACD can FALL while price CONTINUES to rise, because what it measures is MOMENTUM or rate of change in the rate of the rise.

In other words if the price was rising at $1 per day, and then changed to rise at 50c per day, the MACD would reflect the change in momentum by FALLING.

IT works the other way in a stock with a falling price.

I hope that explain it a bit better.

MACD works powerfully in strongly trending markets. If you have a sideways-moving stock, an oscillator like stochastics may be more helpful.

Sometimes other indicators might be required to give a reinforcing view of price action alongside the MACD. One is good - more than one puts you at risk of over-analysis, and you get more interested in the chart than what the price is really telling you.

These days I use MACD alongside a Stochastics oscillator - because trends change all the time. Between the two of them you can be a better judge of where the price is going.

They have not released the “crystal ball” indicator yet, but I think the Russians have a prototype! (I wish!)




	
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