The MACD is calculated by subtracting the values of two exponential moving averages (EMA long-period value is subtracted from the short-period EMA). The most common values used for the MACD are 26-period moving average (length) and a 12-period moving average (short).
The MACD is positive when the EMA (12) is above the EMA (24), indicating that the rate of change of short-period moving average is higher than the average over long periods and negative when the EMA (12) is below the EMA (24), indicating that the exchange rate moving average of short periods is less than the long periods. These values are plotted on a histogram.
Use No. 1 – MACD as an oscillator – to indicate periods of over-buying and over-selling. Recall that a period of over-buying indicates that a currency has been bought at high rates and a turnaround in the short term is feasible. An on-sale period indicates that vendors have sold a currency with a lot of volume to some extent that a change of trend in the short term is feasible.
Whenever the MACD is overbought or oversold readings of the market tends to change direction. But what is considered overbought or oversold MACD? Very good question … is relative to previous highs and lows for the MACD as presets are not to be considered overbought or oversold. This is one of the weaknesses of this use of MACD.
Although the MACD is used very little for these purposes, there are many traders who use it this way with very satisfactory results.
Use No. 2 – MACD and crossing center line – When the MACD crosses from negative territory to positive territory is said to have had a MACD bullish crossover. When the MACD crosses from positive territory to a negative territory is said that the MACD made a bearish cross.
When the MACD histogram crosses from negative territory to positive territory is a buy signal occurs through the use “crossing center line.
Use No. 3 – MACD divergence to operate – A divergence occurs when price behavior differs from the behavior of the indicator. Theoretically, when the price hits new highs or lows, the indicator must also achieve similar maximum or minimum. So when the price reaches new highs and the indicator fails to do so or when the index reaches new highs and the price does not, it says there is a divergence present. The same is true of the next downtrend, when the index reaches new lows and the price is not done or when the price hits new lows and the indicator does not, it also says that there is a discrepancy.
The second floor created by the market is significantly lower than the first floor. However, the MACD fails to make a similar minimum and makes a higher floor. This is a divergence and signaling that sentiment is not as “bearish” as before.
Combining MACD Signals
Consider the following chart and try to determine that we are using to generate our signal.
We are using a divergence signal with a signal crossing center line to generate a sell signal. Once the market believes the gap, we need the histogram below zero crossing to confirm the input signal. And of course we could add the breaking of the support area as well (blue line).