MACD and Parabolic SAR

MACD helps identify a developing trend, typically shown with three settings, commonly 12, 26, 9. The first number is the period for the faster moving average, the second for the slower one, and the third is the period used to smooth the difference between them into a signal line, plotted as a histogram.

A common misconception: the MACD lines aren't moving averages of price itself, they're moving averages of the *difference* between two other moving averages. As the fast and slow lines pull apart, the histogram grows (divergence, not to be confused with the divergence trading technique covered later); as they come back together, it shrinks (convergence).

MACD crossover: when the faster line crosses the slower one, it often signals a new trend forming. The histogram disappears at the moment of the cross (since the difference is zero) and grows again as the new trend develops. MACD's main drawback is lag, since it's essentially a moving average built on top of other moving averages.

Parabolic SAR ("Stop And Reversal") plots a series of dots that shift position relative to price to flag potential trend reversals. Dots below the candles signal a buy; dots above signal a sell, arguably the simplest indicator to read, since it always assumes price is moving one way or the other. It works best in genuinely trending markets with sustained rallies or declines, and poorly in choppy, sideways conditions.