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MACD - Moving Average Convergence Divergence.

MACD is an acronym for Moving Average Convergence Divergence. This tool is used to identify moving averages that are indicating a new trend, whether it's bullish or bearish. After all, our 1. priority in trading is being able to find a trend, because that is where the most money is made.

With an MACD chart, you will usually see three numbers that are used for its settings.<br> The <strong>first </strong>is the number of periods that is used to calculate the <strong>faster moving average</strong>.<br> The <strong>second </strong>is the number of periods that are used in the <strong>slower moving average</strong>.<br> And the <strong>third </strong>is the number of bars that is used to calculate the moving average of the <strong>difference between the faster and slower moving averages</strong>.

For example, if you were to see "<strong>12,26,9</strong>" as the MACD parameters (which is usually the default setting for most charting packages), this is how you would interpret it:<br> - The 12 represents the previous 12 bars of the faster moving average.<br> - The 26 represents the previous 26 bars of the slower moving average.<br> - The 9 represents the previous 9 bars of the difference between the two moving averages.

This is plotted by vertical lines called a histogram (The blue lines in the chart above). There is a common misconception when it comes to the lines of the MACD. The two lines that are drawn are NOT moving averages of the price. Instead, they are the moving averages of the DIFFERENCE between two moving averages.

In our example, the faster moving average is the moving average of the difference between the 12 and 26 period moving averages. The slower moving average plots the average of the previous MACD line. Once again, from our example, this would be a 9 period moving average. This means that we are taking the average of the last 9 periods of the faster MACD line, and plotting it as our "slower" moving average. What this does is it smoothes out the original line even more, which gives us a more accurate line.

The histogram simply plots the difference between the fast and slow moving average. If you look at our original chart, you can see that as the two moving averages separate, the histogram gets bigger. This is called <strong>divergence</strong>, because the faster moving average is "diverging" or moving away from the slower moving average.

As the moving averages get closer to each other, the histogram gets smaller. This is called <strong>convergence </strong>because the faster moving average is "converging" or getting closer to the slower moving average. And so it have the name: <strong>M</strong>oving <strong>A</strong>verage <strong>C</strong>onvergence <strong>D</strong>ivergence!

<span class="postimg"><img src="http://www.ibtimes.de/data/bigimages/848.png" alt="" /></span>

<strong>MACD Bullish Signals</strong><br> MACD generates bullish signals from three main sources:<br> - Positive Divergence<br> - Bullish Moving Average Crossover<br> - Bullish Centerline Crossover<br> - Positive Divergence

A Positive Divergence occurs when MACD begins to advance and the security is still in a downtrend and makes a lower reaction low. MACD can either form as a series of higher Lows or a second Low that is higher than the previous Low. Positive Divergences are probably the least common of the three signals, but are usually the most reliable, and lead to the biggest moves.

<strong>Bullish Moving Average Crossover</strong><br> A Bullish Moving Average Crossover occurs when MACD moves above its 9-day EMA, or trigger line. Bullish Moving Average Crossovers are probably the most common signals and as such are the least reliable. If not used in conjunction with other technical analysis tools, these crossovers can lead to whipsaws and many false signals. Bullish Moving Average Crossovers are used occasionally to confirm a positive divergence. A positive divergence can be considered valid when a Bullish Moving Average Crossover occurs after the MACD Line makes its second "higher Low".

Sometimes it is prudent to apply a price filter to the Bullish Moving Average Crossover to ensure that it will hold. An example of a price filter would be to buy if MACD breaks above the 9-day EMA and remains above for three days. The buy signal would then commence at the end of the third day.<br> Bullish Centerline Crossover

A Bullish Centerline Crossover occurs when MACD moves above the zero line and into positive territory. This is a clear indication that momentum has changed from negative to positive, or from bearish to bullish. After a Positive Divergence and Bullish Centerline Crossover, the Bullish Centerline Crossover can act as a confirmation signal. Of the three signals, moving average crossover are probably the second most common signals.

<strong>Bearish Signals</strong><br> MACD generates bearish signals from three main sources. These signals are mirror reflections of the bullish signals:<br> - Negative Divergence<br> - Bearish Moving Average Crossover<br> - Bearish Centerline Crossover

<strong>Negative Divergence</strong><br> A Negative Divergence forms when the security advances or moves sideways, and the MACD declines. The Negative Divergence in MACD can take the form of either a lower High or a straight decline. Negative Divergences are probably the least common of the three signals, but are usually the most reliable, and can warn of an impending peak.

<strong>Bearish Moving Average Crossover</strong><br> The most common signal for MACD is the moving average crossover. A Bearish Moving Average Crossover occurs when MACD declines below its 9-day EMA. Not only are these signals the most common, but they also produce the most false signals. As such, moving average crossovers should be confirmed with other signals to avoid whipsaws and false readings.

<strong>Bearish Centerline Crossover</strong><br> A Bearish Centerline Crossover occurs when MACD moves below zero and into negative territory. This is a clear indication that momentum has changed from positive to negative, or from bullish to bearish. The centerline crossover can act as an independent signal, or confirm a prior signal such as a moving average crossover or negative divergence. Once MACD crosses into negative territory, momentum, at least for the short term, has turned bearish.
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Publication:International Business Times - US ed.
Geographic Code:1USA
Date:Aug 22, 2009
Words:1043
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