Moving Average Convergence-Divergence
(MACD)
History
Moving Average Convergence-Divergence
(MACD) was originally constructed by
Gerald Appel an analyst in New York.
Originally designed for analysis of stock
trends, it is now widely used in many
markets.
MACD is constructed
by making an average
of the difference
between two moving
averages. The
difference of the
original two moving
averages and the
moving average of the
difference can be
plotted as two lines, one
fast and one slow.
Uses
Most modern charting software now
includes MACD as standard. Once selected
to display in your charting software it
normally shows up as two lines plotted on
an open scale against the zero line. These
two lines will normally be of different color
or one line a solid line and the other a dotted
line. Frequently used settings are 12 and 26
period exponential moving averages with 9
period exponential moving average as the
signal line.
Although there are three moving averages
mentioned you will only see two lines. The
simplest method of use is when the two lines
cross. If the faster signal line crosses above
the slower line then a buy signal is generated
and vice versa. It is also used as an
overbought and oversold indicator. The
higher above the zero both lines are the
more overbought it becomes and the lower
below the zero line both lines are the more
oversold it becomes.
It may also lead to a stronger signal if the
signal line crosses down when it is
overbought and crosses up when it is
oversold. The last common use of MACD is
that of divergence.
If the MACD is making new lows and the
price of the security is not making new lows
that is one form of divergence (bullish
divergence). Also, if the MACD has made a
high and starts to head down but price
continues up that is another type of
divergence (bearish divergence) and may
lead to an indication of a change in
direction.
My Own
Use Of
MACD
I like to
use the
MACD as
a trend
indicator
with
parameters
set at 8
and 18
period
exponentia
l moving
averages
with a 9
period
exponentia
l moving
average as
the signal
line. All I
am trying
to do is
establish a
trend in a
higher
time
period
than the
one I
intend to
trade.
If you
were
trading
day charts
you would
be looking
at the
MACD on
the
weekly. If
you were
trading an
hourly
chart you
might look
at the
MACD on
the daily.
As long as
the signal
line
remains
above or
below the
MACD
line on the
next
higher
time frame
you know
the trend is
still in
place.
As you can see from the chart examples of
the 30 min Cash DJIA there was a sell signal
on the 9th May 02. This was my higher time
frame as I was trading intraday. I then went
to the 5 min chart of the Cash DJIA and sold
the rallies, confident to stay short as long as
my higher time period MACD trend in the
30 min stayed intact. If the 30 min MACD
signal line were to cross up I would have
closed all short positions.
30 Min Chart
5 Min Chart
Good Trading
Mark McRae
Moving Average Convergence-Divergence
(MACD)
Information, charts or examples contained in this lesson
are for illustration and educational purposes only. It
should not be considered as advice or a recommendation
to buy or sell any security or financial instrument. We do
not and cannot offer investment advice. For further
information please read our disclaimer.
