Lesson 1: The MACD

The MACD is an oscillator that shows the directional movement of a stock. There are three main components to the MACD that we will be concentrating on.

The zero/signal line
The EMA
The MACD itself

(click on any picture on this site to enlarge it)
In the chart below you will see an example of the MACD below the price movement of the Dow Jones average. You can click on the chart to enlarge it or right click to open it in a new window. The MACD is the blue line. The EMA is the red line and the black line that runs horizontally is called the Zero or Signal line. Technical analysts watch the MACD because it gives clear signals as to what a stock will do when it crosses certain areas. We use these signals to enter or exit a stock before a move upward or downward.


Lets start by examining the EMA and how to make entry and exits based on the MACD crossing it.


In the chart above you will see 3 points at which the MACD (blue line) crossed the EMA (the red line). At point A the MACD crossed above the EMA( this is called a bullish cross). As you can see the price of the stock started to move upward after the cross. At point B the MACD crossed below the EMA(this is called a bearish cross) and the stock price began to move down. Point C is another bearish cross. In between these major moves you have several minor crosses. Why were these ignored? You should never use just one indicator to make a decision on where to enter or exit a stock. As we build on this foundation by adding more indicators the picture will become clearer and you will see when to overlook or ignore the minor crosses. The chart below gives some more examples of the MACD crossing the EMA. Try to find the bullish and bearish crosses. Remember a bullish cross is when the MACD crosses above the EMA. A bearish cross is when it crosses below the EMA.


The MACD crossing the EMA is usually an early indication of where a stock will go. Sometimes it can fail, meaning, it can show a bullish sign and the stock will fall instead of rising. That is why a lot of Technicians like to wait for the MACD to cross the Zero/Signal line. When the MACD crosses the Zero line it sort of confirms what the EMA already said.


In the cart above the MACD crosses below the zero/signal line(a bearish cross) at point A. After that the stock moves down. Also notice that before the cross in point A the MACD had already crossed below the EMA but the stock price remained relatively flat. In this case the EMA was early and the Zero line cross confirmed the bearish signal. At point B the MACD crossed above the Zero line(a bullish cross) and the stock moved up. Again the EMA cross was early. Below is another example of the MACD crossing the EMA.


The MACD is just one of a number of indicators that technicians use to make decisions on when to enter or exit a stock. We use them because they let us know when a stock is going to move. You can buy, hold, and wait forever for a stock to make a move. But using technical analysis will allow you to buy or short a stock just before it makes the move and profit from that move in a short period of time. For illustration purposes I will always show you three year charts. As a general rule the longer the time period the more accurate the chart and indicator will be. But once you get used to using them you will be able to use 1 year, 1 week, or even 1 day charts to buy and sell in very short periods of time. Try to get your eyes use to seeing these crosses. Practice with as many charts as you can. There is a lot more to learn so click next for lesson 2.