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How To Trade MACD Crossover
Moving Average Convergence-Divergence or MACD is a popular technical indicator developed by Gerald Appel in late 1970's. It is one of the most power technical indicators use by day and swing traders.
MACD consists of three exponential moving averages. It gives a bullish signal when the two lines crossover.
To create MACD:
1. Calculate a 12-day EMA of closing prices.
2. Calculate a 26-day EMA of closing prices.
3. Subtract the 26-day EMA from the 12-day EMA, and plot their difference as a solid line. This is the fast MACD line.
4. Calculate a 9-day EMA of the fast line, and plot the result as a dashed line. This is the slow Signal line.
- When the fast MACD line rises above the slow Signal line, it gives a bullish signal.
You don't have to know the details on how the MACD is created because it is built in by most charting softwares, all you need to know is how to use it.
How to use the MACD Indicator
The MACD gives a bullish signal when the fast MACD line rises above the slow signal line and when the slow signal line rises above the MACD line, it gives a bearish signal.
On the below TTMI chart, whenever the black line (MACD line) crossover above the red line (signal line), it indicates a buy signal. As you can see the stock made a MACD crossover in mid June and August, and the stock went up nicely after the pattern was formed.
The second stock chart is for GOOG. Again, the stock made a MACD crossover in February, and then another one in June. In both cases, the stock went up after this pattern is formed.
MACD crossdown is exactly the opposite of MACD crossover. It generates a bearish signal and indicates it is time to sell or short a stock.
Let's look at the same chart for GOOG. The stock made 2 MACD crossdown as shown on the chart and then stock went down right after the pattern was formed.
If you are manually searching for these patterns, it will take forever. However, you can use our technical stock screener and find these patterns in a matter of seconds. Best of all, you can screen stocks for free.
1. Go to the MACD Stock Screener page.
2. Scroll down to MACD Crossover.
No matter what trading strategies or methods you use, if you trade without a plan, you are doom to fail. Whenever, you buy a stock, you should always have a plan on how you are going to exit the trade, be it profit taking or stop loss.
Without a trading plan, greed and fear will take control and that's how most traders lose their money. Beginners often neglect the importance of money management and risk control, that's the biggest mistake that they can ever make swing trading. Learn how to control risk and start making money trading stocks.
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