MACD Confirming Trend Direction and Reversal of Trend

This indicator is an acronym for Moving Average Convergence Divergence, which was developed by Gerald Appel. It compares a slow moving average and a faster moving average - usually 26 periods for the slow moving average and 12 periods for the fast moving average. A third element is called a signal line. This signal line is a 9-period moving average of the difference between the fast and the slow moving average.

A rule of thumb is that a buying opportunity occurs when the MACD line crosses the signal line and goes above it. A selling opportunity occurs when the MACD line crosses below the signal line. The center line or the 0 line is useful also. When the MACD swings above or below the center line there is another buy or sell potential.

Traders find the MACD complicated. Thomas Aspray introduced a new idea called the MACD Histogram. The MACD histogram is useful in indicating that a trend reversal may be near. What you want to look for is divergence. If the price is going up and the MACD is going down below its signal line, the trend may change.

The histogram version is very useful because the Histogram is a way of showing the distance between the MACD and its signal line. By seeing whether the histogram bars have changed slope, you can see early on if there is a divergence. If the histogram slope is pointing up and the price is flat or still down, this is a sign of a possible reversal. Charts by: chartfinder.com

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