Day Trading with the MACD

The MACD indicator is defined as a moving average convergence divergence; it's used as an indicator to measure momentum. This indicator consists of a "slow" moving average line and a "fast" moving average line. Essentially, the slow moving average is the longer period and the fast moving average is the shorter period. The MACD indicator displays these two lines as they cross over, and under, each other.

Anytime there is divergence between these two moving averages, that's an indication of positive upward momentum in the stock price. Conversely, anytime there is convergence between these two moving averages, that's an indication of a loss of momentum in the stock. The slow period usually consists of a 40 day moving average line and the fast period would consist of a 20 day moving average line. 

How it is used

Day trading MACD requires an understanding of how the indicator is used. Because of its ease of use, many technical traders trade with it. When applying this technical indicator, you will notice that there is positive divergence once the fast moving average line has crossed over the slow moving average line. This will indicate a precursor to positive momentum for the stock. Likewise this scenario would exist for the negative momentum when the fast moving average line has crossed over the slow moving average line while the moving averages are pointing down.

Therefore, looking at the direction of the moving averages and which way they are pointing gives a general indication for the trend the market is currently. What's more the crossing over of the lines gives a general indication for the amount of momentum experienced in the current trend.

When to buy

You can calibrate the indicator to your preferences, but using the default preferences can be just as effective as long as you know your rules on when to buy or sell. When to buy using this indicator is simple, because the crossing over of the lines indicates a precursor to a momentous rally, you should buy as soon as there is a crossover of the lines. You can calibrate the initial buy point based on the technical indicator but the general buy rule on a crossover is plain, simple, and effective. Once you have achieved a positive gain position, the major issue becomes when to sell to close out the position.

When to sell

Although the buy signal is plain, simple and effective, the sell signal to close out the position can be much more ambiguous. Waiting for a negative crossover may make it too late to reap your profits. That's why it is best to have a predetermined set of rules before placing the trade. Usually, you want to cut the losses short after a seven percent loss.  However, each trader will have to determine their own strategies because it is possible for the price to increase. The profit taking becomes an art that needs to be refined by you, the trader.

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