Moving Average Convergence-Divergence Indicator
The Moving Average Convergence-Divergence indicator (MACD), or ‘Mac D’ as it is usually referred to, was devised by Gerald Appel a US investment manager in 1977. It is one of the most popular technical oscillators and uses a moving average crossover method to generate trading signals by measuring price momentum in trending markets. Like all moving average-based indicators, the MACD is a lagging indicator.
Definition
The MACD indicator consists of two lines:
- MACD line – The 12-day EMA less the 26-day EMA.
- Signal line – A 9-day EMA of the MACD line.
The MACD is the difference between two exponential moving averages (EMAs), which are conventionally the 12- day and 26-day. The signal line is a 9-day EMA of the MACD line. It is this line that generates trading signals.
MACD histogram on the same chart. This usually measures the difference between the MACD and signal lines.
Plotted around a zero line, a positive MACD indicates that average prices over the past 12 days are higher than average prices over the past 26 days.
Trading Signals
Plotted around a zero line, a positive MACD indicates that average prices over the past 12 days are higher than average prices over the past 26 days and so signal a bullish market (and vice versa). However, using crosses above and below the zero line is a crude and ineffective method of generating trading signals. Nevertheless, if the MACD remains above or below the zero line for long periods, this suggests that the underlying market trend is either positive or negative so any countertrend signals generate by the lines themselves should be treated with caution.
As usual with all technical indicators and oscillators, traders should be aware of extreme readings, divergence with price, and trends within the indicator itself i.e. descending peaks, rising troughs and movement within channel lines.
Trading signals are most commonly generate by the MACD crossing above or below the signal line:
- A cross of the MACD above the signal line – BUY.
- A cross of the MACD below the signal line – SELL.
What the experts say
‘The MACD indicator is especially effective with longer-term trading strategies (with the Dow) but over the short-term, is not profitable.’ – Robert Colby in his ‘Encyclopedia of Technical Market Indicators’.
‘The MACD works particularly well in the FX markets. It allows you to enter trades with price momentum on your side.’ – Christian Bendixen, Bay Crest Partners.
‘The MACD indicator is a fantastic tool for identifying important price swings. The common parameters (13, 26 and 9 period moving averages) can give signals that are too frequent on a daily bar chart, so I have begun to use 21, 100 and 200 period moving averages to capture more important intermediate-term shifts.’ – Katie Stockton, MKM Partners.
‘When I see a monthly MACD crossover that does not occur very often, say every few years, I pay attention. Same goes for the monthly parabolic and double-top formations that tend to have lasting implications.’ – Jeff Hochman, Fidelity Investments.
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