Moving Average Convergence-Divergence (MACD)

[ellliottt]

Moving Average Convergence-Divergence (MACD)

 

 

Introduction

Developed by Gerald Appel in the late seventies, Moving Average Convergence-Divergence (MACD) is one of the simplest and most effective momentum indicators available. MACD turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average from the shorter moving average. As a result, MACD offers the best of both worlds: trend following and momentum. MACD fluctuates above and below the zero line as the moving averages converge, cross and diverge. Traders can look for signal line crossovers, centerline crossovers and divergences to generate signals. Because MACD is unbounded, it is not particularly useful for identifying overbought and oversold levels.

 

Calculation

 

 

MACD: (12-day EMA - 26-day EMA)

 

Signal Line: 9-day EMA of MACD

 

MACD Histogram: MACD - Signal Line

 

 

Standard MACD is the 12-day Exponential Moving Average (EMA) less the 26-day EMA. Closing prices are used for these moving averages. A 9-day EMA of MACD is plotted along side to act as a signal line to identify turns in the indicator. The MACD-Histogram represents the difference between MACD and its 9-day EMA, the signal line. The histogram is positive when MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA

 

 

 

 

Interpretation

As its name implies, MACD is all about the convergence and divergence of the two moving averages. Convergence occurs when the moving averages move towards each other. Divergence occurs when the moving averages move away from each other. The shorter moving average (12-day) is faster and responsible for most MACD movement. The longer moving average (26-day) is slower and less reactive to price changes in the underlying security.

 

MACD oscillates above and below the zero line, which is also known as the centerline. These crossovers signal that the 12-day EMA has crossed the 26-day EMA. The direction, of course, depends on direction of the moving average cross. Positive MACD indicates that the 12-day EMA is above the 26-day EMA. Positive values increase as the shorter EMA diverges further from the longer EMA. This means upside momentum is increasing. Negative MACD indicates that the 12-day EMA is below the 26-day EMA. Negative values increase as the shorter EMA diverges further below the longer EMA. This means downside momentum is increasing.

 

 

Signal Line Crossovers

Signal line crossovers are the most common MACD signals. The signal line is a 9-day EMA of MACD. As a moving average of the indicator, it trails MACD and makes it easier to spot turns in MACD. A bullish crossover occurs when MACD turns up and crosses above the signal line. A bearish crossover occurs when MACD turns down and crosses below the signal line. Crossovers can last a few days or a few weeks, it all depends on the strength of the move.

 

Signal crossovers are quite common. As such, due diligence is required before relying on these signals. Signal line crossovers at positive or negative extremes should be viewed with caution. Even though MACD is an unbounded oscillator, chartists can estimate historical extremes with a simple visual assessment of the indicator. It takes a strong move in the underlying security to push momentum to an extreme. Even though the move may continue, momentum is likely to slow and this will usually produce a signal line crossover at the extremities. Volatility in the underlying security can also increase the number of crossovers.

 

Chart 2 shows IBM with its 12-day EMA (green), 26-day EMA (red) and MACD (12,26,9) in the indicator window. There were eight signal line crossovers in six months: four up and four down. There were some good signals and some bad signals. The yellow area highlights a period when MACD surged above 2 to reach a positive extreme. There were two bearish signal line crossovers in April and May, but IBM continued trending higher. Even though upward momentum slowed after the surge, upward momentum was still stronger than downside momentum in April and May. The third bearish signal line crossover in May resulted in a good signal.

 

 

[indieover]

i am still learning this one. at first it looks to be complicated one to learn. but it does not seem to be that hard. anyways, i have read that most traders prefer to use indicators than other indicators. but this is not the simplest indicators to learn. but it is quite useful to many traders.

[standart]

I don't know in other platform but I found OsMA in MT4 trading platform and I found it more easy to read and have the same form with MACD. I want to ask to expert trader who maybe know and could explain about OsMA?

[boniez]

we can also use the open top of the MACD to determine the exact position. because the MACD has a peak level of saturation at a price...

[rexway]

Am also learning this indicator sign i have to study it well befor i decid to apply it in other to aviod loos

[cibLyncorinty]

This has been very helpful understanding a lot of things. I'm sure a lot of other people will agree with me.

[adnan007]

I use the default MACD settings with SMA and other technical indicators such as RSI and Fibonacci and let me tell you that this indicator is one of the best and most accurate indicator I have ever seen. It is one of the most widely indicators and the main reason for this is its accuracy levels...

[surya77]

There are two main principles for the use of support resistance in your transaction;

 

-Perform buy or purchase transaction in the support area, and sell or sale transaction in the resistance.

-Perform a transaction to buy or buy when the price passes (break) the resistance, and do sell transaction or the current selling price of passes (break) support area.

[surya77]

Data rates are calculated by the moving average there -macam various options are: Open, High, Low, close, Median Price, Typical price and others.

 

So if you put the moving average with a period setting = 12, aply to = Close, this means the current value of the moving average is the average value of 12 canldestick previous close.

[tray22]

Another good type of indicator which anybody can handle but there is still another problem here as this indicator maybe somehow confuse to the newbie trader and can lead to account blow up it is always good to use stoploss while using this precious indicator in a good manner