MACD - Moving average convergence divergence, is a trend indicator and is best used in a trending market.

When a security has a side ways movement it is best to use another indicator.

The MACD is the difference between a 26 day exponential moving average and a 12 day exponential moving average.

When the faster moving average crosses over the slower moving average from the down side a buy signal is generated.

If the fast moving average crosses over the slow moving average from up side a then a sell signal is generated.

MACD can be used as an over bought and over sold indicator.

When the distance of the two moving averages increases the market is over extended.

Here we can see two examples of an over brought and over sold market. Notice how the moving averages widen.

We see the green arrow showing an over sold market, and the red arrow showing an over bought market.

Divergence is another point we can have in mind. If the security makes new highs without new highs in MACD a divergence has occurred. We can anticipate the price will soon go down

As we can see in this chart, if the security makes new lows without making new lows in MACD, we can anticipate the price will go up.

A good way to plot MACD is to include a 9 day moving average.

A down turn in the MACD 9 day moving average, with a bullish price means the current trend is weakening and long positions should be closed.

Here we see how the MACD 9 day moving average turns down while the trend is going up. Observe the down turn in the price shortly after.

An up turn in MACD 9 day moving average and bearish 26 and 12 day average may signal the market is finding support and strengthening and is ready to rally.

He we can see the 9 day moving average turns up while the other two moving averages weakening, soon after we can we a rally.

It is important to remember that MACD is generally better at signaling the beginning of a bullish move rather than a bearish one and should be applied accordingly.