MACD

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Moving Average Convergence Divergence MACD

Moving Average Convergence Divergence (MACD) line is a Moving Average study.

MACD is one of the most widely used indicators today, it combines noise averaging functionality of the exponential moving average (Mov Avg - Exponential) with the attempt to discover shorter time-scale trends that exist concurrently with the longer time-scale, 'background', trend.. However, like all other indicators it is prone to false signals. In fact, you should only use this to confirm a change in the trend that you can visually draw on the chart. If you rely solely on MACD to get you into and out of trade, you will almost certainly miss out on the big moves.

As developed by Gerald Appel, the basic MACD display is composed of two lines; MACD Graph and the MACD (or Signal) Line.

MACD Graph

The first line plots a single line showing the difference between two exponential moving average calculations. These lagging indicators are turned into a momentum oscillator by subtracting the longer moving average from the shorter moving average. The resulting plot forms a line that oscillates above and below zero, without any upper or lower limits.

The user can set the number of intervals for each moving average, usually the last 12 and 26 days or weeks.

These values are entered in the Short and Long Periods text boxes on the Parameters tabbed page of the MACD Properties dialog box:

macddialog.png

MACD (Signal) Line

The MACD (or Signal) Line is an exponentially smoothed moving average of the MACD Graph line over the user defined Signal Periods, see graphic above.

The default period of 9 is widely used by traders in conjunction with the EMA settings of 12 and 26.

Both lines fluctuate above and below a zero line and are not superimposed over the chart, as moving averages are. This allows the two lines to act together as a oscillator, producing buy or sell signals when they cross.

MACD Histogram

Your SOFTWARE also includes a histogram which shows the difference between the two lines on a histogram based on the zero line.

While not strictly part of Gerald Appel's original MACD concept, it is useful in monitoring the convergence of the two principle lines of the indicator.

The Histogram can be hidden by un-checking its Visible check-box on the Plots tabbed page of the MACD Properties dialog box.

Using the MACD Indicator

The traditional way to use MACD indicator is to consider each point of intersection between the two lines as a trading signal - to buy the stock when the MACD line intersects the Signal line moving upward and to sell when the intersection occurs with the MACD line moving downward:

macdlines.gif

Buy

MACD Graph line crosses over the MACD Line from below and turns up so that both it and the histogram trend agree with the direction of the latest trend.

Sell

MACD Graph line crosses over the MACD Line from above and turns down so that both it and the histogram trend agree with the direction of the latest trend.

Note - While being a more sophisticated and useful indicator then the EMA, MACD also is a lagging indicator, which causes the trading signals to show up later then desired.

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