Yesterday I began a three part series explaining the MACD Indicator and demonstrating the basic functions of MACD. Today I will focus on the most prevalent way traders utilize the MACD and teach you some basic examples to enable you to become a bit more familiar with the MACD indicator. From the experience I can tell you that numerous traders find the MACD very complicated and prevent using it because of that will. In reality the MACD is amongst the simplest indicators to use once you understand the various areas of the indicator. This is why I thought we would separate the MACD into three different tutorials.
The center line crossover is amongst the most popular methods of utilizing the MACD Indicator. A bullish center line crossover occurs if your MACD moves above the actually zero line and turns positive. This happens if your 12-day EMA of the root market moves above the 26-day EMA. A bearish crossover occurs if your MACD moves below the zero line to show negative. This happens when the particular 12-day EMA moves below the particular 26-day EMA.
Before I begin the analysis I have to label each part of the MACD Indicator to stop any confusion. The indicator has three parts that each work together. First we possess the MACD line, this is the indicator which is providing the difference between the 12 bar plus the 26 bar moving average that you just see on the chart. The only real purpose of the MACD line should be to show you a visual representation in the difference between the two shifting averages.
The next line may be the Signal Line. The sole purpose of the Signal Line is to generate a smoothing of the MACD Line. The Signal Line creates a moving average in the MACD line. If you recall in yesterday's tutorial I demonstrated the basics of trading MACD Line along with Signal Line crossovers.
The next area of the MACD Indicator is the Histogram. This is simply the visual representation in the difference between the MACD Line plus the Signal Line. The wider apart the MACD Line moves from the Signal Line the more activity you will observe on the Histogram. If there is very little if any distance between the MACD Line plus the Signal Line then you would see very little if any action on the Histogram.
Make sure you look at the MACD Indicator just as one external and internal indicator. Meaning the MACD Line presents what is currently happening when it comes to market price. However, the Signal Line plus the Histogram are internal and only reply to the indicator and not this market. I call the Signal Line plus the Histogram indicators for another warning.
In today's exercise we defintely won't be using either the Signal Line or the Histogram so you only have to focus on the MACD Line. I'm going to turn with both of the moving averages so you can see how the Center Line crossover signal is generated.
Pay attention to the Moving Averages and notice what the results are each time they cross each other both in route up and on the means down. Each time the moving averages cross each other the MACD Line crosses either above or below the center Line. Center Line is only a middle ground zero area and each time the MACD Line moves north in the Center Line it means that the short term or fast shifting average has crossed above the particular slow moving average. In our case the 12 day moving average may be the fast moving average and the particular 26 day moving average may be the slow moving average. Conversely, each time the MACD Line moves south in the Center Line the slow shifting average has crossed above the fast moving average and consequently the trend turned down.
The main point I want one to get from this exercise is that the Center Line crossover is yet another way of analyzing a self-explanatory exponential moving average crossover and never have to use the moving average signals. Here is one chart with the two fast and the slow moving average plus the MACD Indicator below. You can see how each time the MACD Line crossover either above or below the center Line the EMA's above cross at the very same time. I hope that takes some of the mystery out of the MACD Indicator.
Remember that the MACD should be looked at as two different indicators. An external indicator that reflects price and an internal indicator that reflects what the particular MACD does and avoids cost completely. By understanding each area of the MACD you can begin to find out how all the pieces come together.
Tomorrow I will show you how to modify the MACD and some actual examples so you can put the MACD Indicator to utilize.
The center line crossover is amongst the most popular methods of utilizing the MACD Indicator. A bullish center line crossover occurs if your MACD moves above the actually zero line and turns positive. This happens if your 12-day EMA of the root market moves above the 26-day EMA. A bearish crossover occurs if your MACD moves below the zero line to show negative. This happens when the particular 12-day EMA moves below the particular 26-day EMA.
Before I begin the analysis I have to label each part of the MACD Indicator to stop any confusion. The indicator has three parts that each work together. First we possess the MACD line, this is the indicator which is providing the difference between the 12 bar plus the 26 bar moving average that you just see on the chart. The only real purpose of the MACD line should be to show you a visual representation in the difference between the two shifting averages.
The next line may be the Signal Line. The sole purpose of the Signal Line is to generate a smoothing of the MACD Line. The Signal Line creates a moving average in the MACD line. If you recall in yesterday's tutorial I demonstrated the basics of trading MACD Line along with Signal Line crossovers.
The next area of the MACD Indicator is the Histogram. This is simply the visual representation in the difference between the MACD Line plus the Signal Line. The wider apart the MACD Line moves from the Signal Line the more activity you will observe on the Histogram. If there is very little if any distance between the MACD Line plus the Signal Line then you would see very little if any action on the Histogram.
Make sure you look at the MACD Indicator just as one external and internal indicator. Meaning the MACD Line presents what is currently happening when it comes to market price. However, the Signal Line plus the Histogram are internal and only reply to the indicator and not this market. I call the Signal Line plus the Histogram indicators for another warning.
In today's exercise we defintely won't be using either the Signal Line or the Histogram so you only have to focus on the MACD Line. I'm going to turn with both of the moving averages so you can see how the Center Line crossover signal is generated.
Pay attention to the Moving Averages and notice what the results are each time they cross each other both in route up and on the means down. Each time the moving averages cross each other the MACD Line crosses either above or below the center Line. Center Line is only a middle ground zero area and each time the MACD Line moves north in the Center Line it means that the short term or fast shifting average has crossed above the particular slow moving average. In our case the 12 day moving average may be the fast moving average and the particular 26 day moving average may be the slow moving average. Conversely, each time the MACD Line moves south in the Center Line the slow shifting average has crossed above the fast moving average and consequently the trend turned down.
The main point I want one to get from this exercise is that the Center Line crossover is yet another way of analyzing a self-explanatory exponential moving average crossover and never have to use the moving average signals. Here is one chart with the two fast and the slow moving average plus the MACD Indicator below. You can see how each time the MACD Line crossover either above or below the center Line the EMA's above cross at the very same time. I hope that takes some of the mystery out of the MACD Indicator.
Remember that the MACD should be looked at as two different indicators. An external indicator that reflects price and an internal indicator that reflects what the particular MACD does and avoids cost completely. By understanding each area of the MACD you can begin to find out how all the pieces come together.
Tomorrow I will show you how to modify the MACD and some actual examples so you can put the MACD Indicator to utilize.
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