MACD oscillators are used by seasoned traders for generating entry and exit signals. The MACD oscillator is always interpreted in conjunction with other indicators such as Darva's Boxes and the like for better clarity for the decision making purposes. Further more the use of MACD is done along with the MACD histogram which fairly gives indication about he momentum of the currency and its trend.
There are three most popular ways of using the MACD Oscillator.
1. Crossover Method: The crossover method gives a fairly good indicator of price reversal. The crossings of MACD line with the signal line are the two indicators of price changes. The bullish price change is indicated when the MACD crosses over the signal line and when it crosses below the signal line the indication is bearish. Now he MACD line is the difference in the 26 and 12 day Exponential Moving Averages and the signal line is 9 day Exponential Moving Average.
2. Dramatic Rise in MACD When the MACD oscillator shows a dramatic rise it is signaling that the price of currency high and it is over bought. This time round, the price is in for a good correction sooner or later. At the same time, the shorter period moving average rises above the long term moving average at a great angle and places itself far apart from the long term moving average.
3. The Divergence Factor: Check for divergence or convergence of price line from the MACD. Such an occurrence is an indicator of price reversal.
The positional occurrences of cross overs also play important decision making roles. This means, if the upward crossing of MACD from below the signal line occurs below the zero line it can be taken as a pretty strong signal and vice versa.
When MACD is above the zero line and short term moving average crosses above the long term moving average line, it can be taken as a positive signal and as having a good momentum. This is a fairly strong signal to make an entry into long positions.
Seasoned campaigners use another indicator called as MACD Histogram in tandem. The histogram represents the difference between the trigger line (9 day moving average line) and the MACD itself. The difference value plotted makes for clarity of the oscillator.
Currencies tend to trend more and fluctuate less violently unlike stocks which behave pretty much the different way. The reason for this is not hard to understand. Currencies trend depending on the countries foreign and economic policies which are macro economic in nature and the currency pairs take fairly long enough time to react to any change in policies. Where as stock movements are more or less determined by microeconomic factors and market sentiments.
Word of Caution
MACD oscillator is never used standalone. Never arrive at investment decisions before consulting 3-4 more indicators.
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