Moving Average Convergence/Divergence (MACD)
posted under
Philosophy of Technical Analysis
by ceecabolos
We mentioned in the previous chapter an oscillator technique that uses 2 exponential moving averages and here it is. The Moving Average Convergence/Divergence indicator, or simply MACD, was developed by Gerald Appel. What makes this indicator so useful is that it combines some of the oscillator principles we've already explained with a dual moving average crossover approach. You'll see only two lines on your computer screen although three lines are actually used in its calculation. The faster
line (called the MACD line) is the difference between two exponentially smoothed moving averages of closing prices (usually the last 12 and 26 days or weeks). The slower line (called the signal line) is usually a 9 period exponentially smoothed average of the MACD line. Appel originally recommended one set of numbers for buy signals and another for sell signals. Most traders, however, utilize the default values of 12, 26, and 9 in all instances. That would include daily and weekly values. (See Figure 10.19a.)
The actual buy and sell signals are given when the two lines cross. A crossing by the faster MACD line above the slower signal line is a buy signal. A crossing by the faster line below the slower is a sell signal. In that sense, MACD resembles a dual moving average crossover method. However, the MACD values also fluctuate above and below a zero line. That's where it begins to resemble an oscillator. An overbought condition is present when the lines are too far above the zero line. An oversold condition is present when the lines are too far below the zero line. The best buy signals are given when prices are well below the zero line (oversold). Crossings above and below the zero line are another way to generate buy and sell signals respectively, similar to the momentum technique we discussed previously.Divergences appear between the trend of the MACD lines and the price line. A negative, or bearish, divergence exists when the MACD lines are well above the zero line (overbought) and start to weaken while prices continue to trend higher. That is often a warning of a market top. A positive, or bullish, divergence exists when the MACD lines are well below the zero line (oversold) and start to move up ahead of the price line. That is often an early sign of a market bottom. Simple trendlines can be drawn on the MACD lines to help identify important trend changes..
line (called the MACD line) is the difference between two exponentially smoothed moving averages of closing prices (usually the last 12 and 26 days or weeks). The slower line (called the signal line) is usually a 9 period exponentially smoothed average of the MACD line. Appel originally recommended one set of numbers for buy signals and another for sell signals. Most traders, however, utilize the default values of 12, 26, and 9 in all instances. That would include daily and weekly values. (See Figure 10.19a.)
The actual buy and sell signals are given when the two lines cross. A crossing by the faster MACD line above the slower signal line is a buy signal. A crossing by the faster line below the slower is a sell signal. In that sense, MACD resembles a dual moving average crossover method. However, the MACD values also fluctuate above and below a zero line. That's where it begins to resemble an oscillator. An overbought condition is present when the lines are too far above the zero line. An oversold condition is present when the lines are too far below the zero line. The best buy signals are given when prices are well below the zero line (oversold). Crossings above and below the zero line are another way to generate buy and sell signals respectively, similar to the momentum technique we discussed previously.Divergences appear between the trend of the MACD lines and the price line. A negative, or bearish, divergence exists when the MACD lines are well above the zero line (overbought) and start to weaken while prices continue to trend higher. That is often a warning of a market top. A positive, or bullish, divergence exists when the MACD lines are well below the zero line (oversold) and start to move up ahead of the price line. That is often an early sign of a market bottom. Simple trendlines can be drawn on the MACD lines to help identify important trend changes..
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