IntroductionMACD stands for Moving Average Convergence Divergence. As the name suggests the MACD is the convergence and divergence of 2 moving averages. The MACD is a different way of looking at the moving average crossover indicator, using exponential equations to indicate trend and momentum changes to give us trading signals. Thus, The MACD is an indicator used in trending markets and not generally in range bound markets. Developed in the 1970’s by Gerald Appel - The reliable MACD indicator is the most popular tool in technical analysis as it gives traders the ability to quickly and easily identify the direction of the short-term trend. The clear Buy and Sell signals take the emotion and subjectivity out of trading.Calculating and Plotting The MACD The MACD is an Oscillator and is calculated by taking the 12-day EMA and subtracting the 26-day EMA. Given this construction the MACD must be equal to zero every time the two moving averages cross each other. The result is plotted below the financial markets chart and oscillates around a centre line valued at zero. The MACD is usually plotted along with a MACD signal indicator, which is a 9-day moving average of the MACD indicator itself. Most trading software packages calculate the MACD for you; so learning the below calculation is not needed (MACD = 12-day EMA – 26-day EMA) The MACD is the 2nd derivative (derivative of a derivative) of price - because the two moving averages are themselves a derivative of the price mechanism. The Purpose of The MACD The MACD monitors the relationship between the 12-day and 26-day EMA and highlights potential trading opportunities, through price momentum changes. We can see this in the below daily chart. When the MACD is above zero it tells us that the 12-day is moving above the 26-day EMA and when the MACD is below zero the 12-day is moving below the 26-day EMA. As the MACD crosses zero the 12-day and 26-day EMA cross in our chart, indicating a possible momentum change. Familiar? This is just another way of representing the moving average double crossover. At it’s most basic level, the MACD helps traders ensure the short-term trend is working in their favour. There are various trading strategies associated with The MACD. One of which is the zero line crossover - equivalent to the moving average double crossover strategy from our previous section. A move above zero indicates a buy signal and a move below zero indicates a sell or shorting signal. I've highlighted these buys and sells in the below chart with a b and s. However, you can see that these buy and sell signals are numerous in a ranging market and can cause lots of pain, what is known as whipsaw. MACD is best used in a trending market.measuring changing price momentum where short-term prices are increasing or decreasing faster or slower than long-term prices. When the MACD is above zero and rising we have increasing price momentum (Green arrow on above chart), where the gap between the 12-day and 26-day EMA is widening. When the MACD is below zero and decreasing we have increasing downside momentum where the gap between the 2 moving averages is again widening. The further the MACD is from the zero line, the greater is the change in momentum. The MACD was designed to profit from this EMA divergence, indicating momentum changes and trading opportunities. This can be clearly seen in the above chart. The Signal Line – 9-Day MACD Moving Average The MACD signal line (sometimes called the trigger line) is the 9-day EMA of the MACD line itself. Thus the signal line is the 3rd derivative of price. The purpose of the 9-day MACD EMA is to re-confirm the changes in momentum to signal trading triggers. In the above and below chart the signal line or trigger line is drawn in red in the bottom box. The MACD Signal Line Crossover This introduces a new trading strategy - The MACD, signal line crossover (well expand upon this later). As you can see Buy signals are generated when the MACD (in blue) crosses above the 9-day signal line (in red) and Sell/Short signals are generated when the MACD crosses under the 9-day signal line. You’ll note that the MACD doesn’t need to cross the zero line to generate trading signals, unlike crossover strategy above. This relationship between the MACD and it’s 9-day EMA increases the number of signals a trader gets and in general highlights the change in momentum more quickly than the signals created by the MACD crossing the Zero line. You can see that trades 1, 2 and 3 look profitable, but trade 4 may have been stopped out – as with moving averages trending markets are best for the trading environment and traders are whipsawed in ranging markets where change in momentum is weaker. However, traders can also be whipsawed in a trending market when using the MACD, as it’s sensitive to small changes in momentum. MACD Histogram Many trading software packages and charting packages will plot a histogram along with the MACD, which represents the distance between the MACD and the signal/trigger line (It’s 9-day EMA). Thus, it’s also measuring price change momentum (rate of change in price) and the direction of momentum. In effect the histogram can be utilised to anticipate signal line crossovers. This will be disussed in more detail in the next section – “Using MACD in the Trading Environment”. As a note: The MACD Histogram is the 4th derivative of price – It’s a derivative of the signal line and the MACD, which in-turn is a derivative of the 12 and 26-day EMA’s, which are a derivative or price. The MACD Histogram Many traders find the MACD and Histogram so useful because they gauges the strength of the price movement and the direction of its trend. Changing The MACD ParametersThe standard setting for MACD is the difference between the 12 and 26-period EMAs. Chartists looking for more sensitivity may try a shorter short-term moving average and a longer long-term moving average. MACD(5,35,5) is more sensitive than MACD(12,26,9) and might be better suited for weekly charts. Chartists looking for less sensitivity may consider lengthening the moving averages. A less sensitive MACD will still oscillate above/below zero, but the centerline crossovers and signal line crossovers will be less frequent. More... |

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IntroductionMACD stands for Moving Average Convergence Divergence. As the name suggests the MACD is the convergence and divergence of 2 moving averages. The MACD is a different way of looking at the moving average crossover indicator, using exponential equations to indicate trend and momentum changes to give us trading signals. Thus, The MACD is an indicator used in trending markets and not generally in range bound markets. Developed in the 1970’s by Gerald Appel - The reliable MACD indicator is the most popular tool in technical analysis as it gives traders the ability to quickly and easily identify the direction of the short-term trend. The clear Buy and Sell signals take the emotion and subjectivity out of trading.Calculating and Plotting The MACD The MACD is an Oscillator and is calculated by taking the 12-day EMA and subtracting the 26-day EMA. Given this construction the MACD must be equal to zero every time the two moving averages cross each other. The result is plotted below the financial markets chart and oscillates around a centre line valued at zero. The MACD is usually plotted along with a MACD signal indicator, which is a 9-day moving average of the MACD indicator itself. Most trading software packages calculate the MACD for you; so learning the below calculation is not needed (MACD = 12-day EMA – 26-day EMA) The MACD is the 2nd derivative (derivative of a derivative) of price - because the two moving averages are themselves a derivative of the price mechanism. The Purpose of The MACD The MACD monitors the relationship between the 12-day and 26-day EMA and highlights potential trading opportunities, through price momentum changes. We can see this in the below daily chart. When the MACD is above zero it tells us that the 12-day is moving above the 26-day EMA and when the MACD is below zero the 12-day is moving below the 26-day EMA. As the MACD crosses zero the 12-day and 26-day EMA cross in our chart, indicating a possible momentum change. Familiar? This is just another way of representing the moving average double crossover. At it’s most basic level, the MACD helps traders ensure the short-term trend is working in their favour. There are various trading strategies associated with The MACD. One of which is the zero line crossover - equivalent to the moving average double crossover strategy from our previous section. A move above zero indicates a buy signal and a move below zero indicates a sell or shorting signal. I've highlighted these buys and sells in the below chart with a b and s. However, you can see that these buy and sell signals are numerous in a ranging market and can cause lots of pain, what is known as whipsaw. MACD is best used in a trending market.measuring changing price momentum where short-term prices are increasing or decreasing faster or slower than long-term prices. When the MACD is above zero and rising we have increasing price momentum (Green arrow on above chart), where the gap between the 12-day and 26-day EMA is widening. When the MACD is below zero and decreasing we have increasing downside momentum where the gap between the 2 moving averages is again widening. The further the MACD is from the zero line, the greater is the change in momentum. The MACD was designed to profit from this EMA divergence, indicating momentum changes and trading opportunities. This can be clearly seen in the above chart. The Signal Line – 9-Day MACD Moving Average The MACD signal line (sometimes called the trigger line) is the 9-day EMA of the MACD line itself. Thus the signal line is the 3rd derivative of price. The purpose of the 9-day MACD EMA is to re-confirm the changes in momentum to signal trading triggers. In the above and below chart the signal line or trigger line is drawn in red in the bottom box. The MACD Signal Line Crossover This introduces a new trading strategy - The MACD, signal line crossover (well expand upon this later). As you can see Buy signals are generated when the MACD (in blue) crosses above the 9-day signal line (in red) and Sell/Short signals are generated when the MACD crosses under the 9-day signal line. You’ll note that the MACD doesn’t need to cross the zero line to generate trading signals, unlike crossover strategy above. This relationship between the MACD and it’s 9-day EMA increases the number of signals a trader gets and in general highlights the change in momentum more quickly than the signals created by the MACD crossing the Zero line. You can see that trades 1, 2 and 3 look profitable, but trade 4 may have been stopped out – as with moving averages trending markets are best for the trading environment and traders are whipsawed in ranging markets where change in momentum is weaker. However, traders can also be whipsawed in a trending market when using the MACD, as it’s sensitive to small changes in momentum. MACD Histogram Many trading software packages and charting packages will plot a histogram along with the MACD, which represents the distance between the MACD and the signal/trigger line (It’s 9-day EMA). Thus, it’s also measuring price change momentum (rate of change in price) and the direction of momentum. In effect the histogram can be utilised to anticipate signal line crossovers. This will be disussed in more detail in the next section – “Using MACD in the Trading Environment”. As a note: The MACD Histogram is the 4th derivative of price – It’s a derivative of the signal line and the MACD, which in-turn is a derivative of the 12 and 26-day EMA’s, which are a derivative or price. The MACD Histogram Many traders find the MACD and Histogram so useful because they gauges the strength of the price movement and the direction of its trend. Changing The MACD ParametersThe standard setting for MACD is the difference between the 12 and 26-period EMAs. Chartists looking for more sensitivity may try a shorter short-term moving average and a longer long-term moving average. MACD(5,35,5) is more sensitive than MACD(12,26,9) and might be better suited for weekly charts. Chartists looking for less sensitivity may consider lengthening the moving averages. A less sensitive MACD will still oscillate above/below zero, but the centerline crossovers and signal line crossovers will be less frequent. More... |

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