Technical Indicators: MACD (Basic)
Most of you would agree with me that just by looking at the price alone, it's very hard to tell when the market will reverse or move sideways.
There are many tools available that can generate early warning signals. Moving Average Convergence Divergence(MACD) created by Gerald Appel, is one such tool. It is one of the simplest and most reliable indicators around. Traders love MACD.
The image below shows the MACD indicator. The thick red line is the MACD while the thin yellow line is the 9-day EMA, also known as the trigger line. The histogram represents the difference between MACD and its 9-day EMA. The histogram is positive when MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA.
The trading rules are:
Bullish when
1) MACD crossover and above the yellow line
2) MACD crosses above zero line
Bearish when
1) MACD crossover and below the yellow line
2) MACD crosses below zero line
Now, let's take a look how this indicator facilitates our analysis.
As you can see, with the help of MACD, I am able to know when a reversal will probably take place.
