Trend Following Momentum Indicator

Many investors will tell you that your potential for success in the stock market is completely dependent on your grasp of market price movements and the way that you exploit your sense of timing to result in the highest profits possible. This seems simple enough, simply buy stocks at the lowest price possible, and sell them at the highest price possible before they head south again; however like many things, it is easier said than done. If you're interested in perfecting your sense of timing, and learning how to buy and sell stocks at just the right moment in the trend, it's important for you to become familiar with something called MACD technical analysis.

MACD technical analysis stands for Moving Average Convergence Divergence, and is a trend-following momentum indicator which is used to show how two different flexible price averages relate to each other. You can calculate the MACD by deducting the twenty-six day exponential moving average (also known as the EMA) from the 12-day EMA. Then, a nine-day EMA of the MACD is plotted at the top of the MACD and called the "signal line." This line functions like a trigger indicator for investors' buying and selling signals.

If you're interested in using MACD technical analysis on your own charts, it's important that you learn the three different methods commonly used for interpreting the moving average convergence divergence. The first method is called the crossover, and it is a bearish signal that appears when the MACD drops lower than the signal line. Investors usually take this signal to mean that it may be time to sell to the highest bidder. With the convergence it can be easy to get "faked out" by the market, so be sure to be patient and wait it out for a confirmed cross above the signal line before seeking a seller's position.

The second most common MACD technical analysis method is called divergence, and it works opposite to the way that the convergence works. You can spot the divergence by looking for the point where the security price breaks away from the MACD, signally the fact that the current trend has come to an end. The third and finally method is called the dramatic rise, and it can be spotted by waiting for the shorter moving average to break away from the longer term moving average. Investors usually interpret this as a signal that the security has been overbought, meaning that it will soon return to normal price levels.