What Are the Different Types of MACD Strategy?

An MACD strategy is any strategy that utilizes the Moving Average Convergence-Divergence Indicator as its basis for picking stocks. Many strategies can be utilized using the MACD, which compares the difference between the moving average of a stock for 12 days and for 26 days. Depending upon the direction that the MACD Indicator line on a chart crosses the "signal line," a 9-day moving average of the MACD itself, investors may receive signals to buy or sell. Another typical MACD strategy is to see of the MACD rises high or sinks low below zero, which indicates the existence of trend momentum.

Many investors use technical analysis to choose stocks. Technical analysis uses charts and averages to find out how the past performance of stocks can be used to predict future movement. An exponential moving average of a stock is its average price over a period of time which then moves up and down as time passes. The Moving Average Convergence-Divergence Indicator uses the difference between moving averages from two different periods of time to indicate not only a trend but also the momentum of that trend. Investors deciding upon an MACD strategy have several different ones from which to choose.

Utilizing the signal line is one typical MACD strategy. The signal line is the nine-day moving average of the MACD itself. When the MACD line crosses the signal line on a chart in an upward direction, investors consider that a signal to buy the corresponding security. If it should cross the signal line going down, investors are expected to sell.

Another useful MACD strategy is studying how close or far the MACD gets from zero as an indicator of momentum. If the MACD rises to a level significantly higher than zero, it means that the shorter average is outperforming the longer one. This allows the strength and momentum of the price trend to be verified. A strong downward trend is indicated if the MACD falls far below zero.

One other useful MACD strategy is to use the indicator in conjunction with current prices to signal the possible reversal of a trend. At a time when prices plummet to a low and the MACD also hits a low but at a higher level than the stock price, it can be a good indication of a bullish divergence. This means that the price could soon start to reverse itself and move in a bullish, or positive, direction. When the opposite occurs and a price high correlates with a lower high on the MACD, a bearish, negative divergence could be in the offing.