The MACD IndicatorWhat is it?The MACD shows the relationship of prices between the difference of a 12 period and a 26 period exponential moving average and a 9 period average of itself. As such, it shows us if prices are rising or falling relative to the current trend, rather than overbought or oversold conditions.MACD is typically used in range-bound markets, with its signal being the cross of the averages. We want to use it in combination with the Stochastic oscillator to highlight opportunities. Trend ConfirmationThe primary function in our system of the MACD is to confirm the longer term directional bias of the trend, but it is also very helpful to watch for divergence between the current price action and the MACD.Looking at the image below, you'll notice the price action is rising as shown by the blue line, but the MACD histogram is falling which usually indicates the current price trend is likely to soon reverse direction.
Add the MACD to your charts and observe how it moves in relation the prices. It is an indicator that is followed by many traders and you should be familiar with it. Next week we'll tweak our indicators and add a major component to complete the picture. Wishing you trading success,
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