Zero crossovers provide evidence of a change in the direction of a trend but less confirmation of its momentum than a signal line crossover. A "positive divergence" or "bullish divergence" occurs when the price makes a new low but the MACD does not confirm with a new low of its own. A "negative divergence" or "bearish divergence" occurs when the price makes a new high but the MACD does not confirm with a new high of its own.
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The MACD is only as useful as the context in which it is applied. An analyst might apply the MACD to a weekly scale before looking at a daily scale, in order to avoid making short term trades against the direction of the intermediate trend. One popular short-term set-up, for example, is the 5,35,5. Like any forecasting algorithm, the MACD can generate false signals.
A false positive, for example, would be a bullish crossover followed by a sudden decline in a stock. A false negative would be a situation where there is bearish crossover, yet the stock accelerated suddenly upwards. A prudent strategy may be to apply a filter to signal line crossovers to ensure that they have held up.
An example of a price filter would be to buy if the MACD line breaks above the signal line and then remains above it for three days. As with any filtering strategy, this reduces the probability of false signals but increases the frequency of missed profit. A MACD crossover of the signal line indicates that the direction of the acceleration is changing. The MACD line crossing zero suggests that the average velocity is changing direction.
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From Wikipedia, the free encyclopedia. This article is about stock price analysis. For other uses, see MACD disambiguation. Financial Times Prentice Hall. ISBN A MACD trading strategy example".
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Bullish Divergences and Bearish Reversal Signals
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Bullish Divergences and Bearish Reversal Signals
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