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Hi Tony,
In "The Visual Investor", John Murphy presents three different ways to
interpret MACD - as a trend-following indicator, as an oscillator and
as a divergence indicator.
Using MACD as a trend following indicator is just as you stated in you
message, buy when the MACD line rises above the signal line, sell when
it falls below it. The zero line is not important here.
Using MACD as an oscillator is where the zero line becomes relevant.
In this interpretation, the zero line divides overbought (positive)
and oversold (negative) territory. As with other bounded oscillators,
signals can be generated either when the oscillator rises or falls
above a certain level (indicating "too oversold" or "too overbought")
or they can be generated when the oscillator (and optionally the
signal line) cross from oversold into overbought territory (bearish)
or vice-versa.
Murphy also states that you can combine the two methods above by
waiting until the lines cross the zero line as confirmation of a
signal generated when they cross themselves. For example if the lines
cross while in oversold (negative) territory (generating a buy
signal), you'd wait until both lines crossed into positive territory
until buying.
Finally, Murphy mentions that trendlines can be used on the the MACD
oscillator to spot divergences from the price action that may indicate
weakness in the current trend.
Hope this helps,
Chip
See http://coolhistory.com/ChipsCharts for more
---Tony Lonsdale <tonyl@xxxxxxxxxxx> wrote:
>
> Hi,
> Here comes another "simple" question please...
>
> I understand the basic rules for interpreting the MACD, as stated in
the
> MS Help file:
> "The basic MACD trading rule is to sell when the MACD falls below its
> 9-period signal line. Similarly, a buy signal occurs when the MACD
> rises above its signal line"
>
> But can someone please explain the significance of the Zero "line"?
>
> Is it significant to note whether the MACD value is above or below
> zero?
>
> When it CROSSES the zero line (going up or down), is there any useful
> interpretation to be gained?
>
> Thanks again... Tony
>
> ----------------
> Tony Lonsdale
> Fishing Point
> Australia
> ----------------
>
>
>
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