Macd is one of the most used studies in the technical analysis was introduced to the world of traders in 1960th and represent the difference between two exponential moving averages. This indicator is used to generate trading signals as well as to confirm a trend.
What is the MACD indicator?
Moving average convergence divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA.
What is a MACD divergence?
Moving average convergence divergence (MACD), invented in 1979 by Gerald Appeal, is one of the most popular technical indicators in trading. The MACD is appreciated by traders the world over for its simplicity and flexibility because it can be used either as a trend or momentum indicator.
How does the MACD work?
The MACD is just the difference between a 26-day and 12-day exponential moving average of closing prices (an exponential moving average or EMA is one where more weight is given to the latest data). A 9-day EMA, called the "signal" (or "trigger") line is plotted on top of the MACD to show buy/sell opportunities.
MACD (Moving Average Convergence / Divergence) is one of the most popular studies in the technical analysis. Created by Gerald Appel in the 1960s this indicator reveals the shorter-term trend changes in relegation to the longer-term trend. The MACD formula is simple:
MACD = EMA1 – EMA2
Where EMA1 is a fast moving average that reflect shorter-term trend and EMA2 is a slow moving average that reflects longer-term trend. MACD is always used in a combination with a signal line which is exponential or simple moving average applied to MACD line. The signal line is used to smooth MACD and generate signals on its crossovers with MACD.
One of the most used settings for MACD is 12 for EMA1, 26 for EMA2 and 9 for signal line. Still this setting is not always fit to trading needs of all traders; therefore, the setting could vary depending on a trader's personal trading style.
The difference between the MACD and signal line forms the Histogram which was first used in 1986 by Thomas Aspray.
In technical analysis MACD is considered as a trend following indicator and is used to generate signals as well as to confirm a trend. There are three basic ways of using this indicator.
The first way of using MACD is to look for its crossovers with zero line. Positive MACD confirms an up-trend and negative MACD confirms down-trend. Thus, when this indicator drops below zero line it could be considered as a signal to sell short and when it raises above zero line it could be considered as a signal to buy long.
The second way of using MACD is to trade it and Signal Line crossovers. This is the same as to look for MACD Histogram and zero line crossovers. The technical analysis says that when MACD crosses signal line on its way down it signals selling and when it crosses signal line on its way up it signals buying.
The third way of using MACD is to define moments of divergence between price and MACD. In particular, a buy signal could be generated when price makes new low, yet MACD stays above its previous lowest point. Controversially, a sell signal could be generated when price makes new high, yet MACD stays below its previously hit high level.
Despite the fact that MACD is one of the oldest studies in technical analysis, as many other studies it generates fake signals. Furthermore, it is recommended to use it in junction with other indicators. Since MACD is price based indicator it could be a good choice to use volume based indicators to complete a trading system that uses MACD analysis.