Appel is a professional money manager, directing the management of Investor assets for more than thirty-five years. Besides being a professional investment advisor, he has authored or co-authored more than fifteen books, as well as numerous articles, relating to investment strategies. He is a recognized expert in the field of technical market analysis. 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. Appel is one of the most prolific inventors of technical trading tools, many of which have become popular worldwide.
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Learning to trade in the direction of short-term momentum can be a difficult task at the best of times, but it is exponentially more difficult when one is unaware of the appropriate tools that can help. Gerald Appel developed this indicator in the s, and although its name sounds very complicated, it's really quite simple to use. Read on to learn how you can start looking for ways to incorporate this powerful tool into your trading strategy. However, before we jump into the inner workings of the MACD, it is important to completely understand the relationship between a short-term and long-term moving average.
This bullish crossover suggests that the price has recently been rising at a faster rate than it has in the past, so it is a common technical buy sign. Notice how the moving averages diverge away from each other in Figure 1 as the strength of the momentum increases. Specifically, the value for the long-term moving average is subtracted from the short-term average, and the result is plotted onto a chart.
The periods used to calculate the MACD can be easily customized to fit any strategy, but traders will commonly rely on the default settings of and day periods.
A positive MACD value, created when the short-term average is above the longer-term average, is used to signal increasing upward momentum. This value can also be used to suggest that traders may want to refrain from taking short positions until a signal suggests it is appropriate.
On the other hand, falling negative MACD values suggest that the downtrend is getting stronger, and that it may not be the best time to buy. It has become standard to plot a separate moving average alongside the MACD, which is used to create a clear signal of shifting momentum. A signal line , also known as the trigger line , is created by taking a nine-period moving average of the MACD. This is found plotted alongside the indicator on the chart. The basic bullish signal buy sign occurs when the MACD line the solid line crosses above the signal line the dotted line , and the basic bearish signal sell sign is generated when the MACD crosses below the signal line.
Traders who attempt to profit from bullish MACD crosses that occur when the indicator is below zero should be aware that they are attempting to profit from a change in momentum direction, while the moving averages are still suggesting that the security could experience a short-term sell-off.
This bullish crossover can often correctly predict the reversal in the trend, as shown in Figure 2, but it is often considered riskier than if the MACD were above zero. Another common signal that many traders watch for occurs when the indicator travels in the opposite direction of the asset, something known as divergence. This concept takes further study and is often used by experienced traders.
Given this construction, the value of the MACD indicator must be equal to zero each time the two moving averages cross over each other. As you can see in Figure 3, a cross through the zero line is a very simple method that can be used to identify the direction of the trend and the key points when momentum is building. In the previous examples, the various signals generated by this indicator are easily interpreted and can be quickly incorporated into any short-term trading strategy.
At the most basic level, the MACD indicator is a very useful tool that can help traders ensure that short-term direction is working in their favor. The biggest disadvantage of using this indicator to generate transaction signals is that a trader can get whipsawed in and out of a position several times before being able to capture a strong change in momentum.
As you can see in the chart, the lagging aspect of this indicator can generate several transaction signals during a prolonged move, and this may cause the trader to realize several unimpressive gains or even small losses during the rally. The large number of false signals can result in a trader taking many losses. When commissions are factored into the equation, this strategy can become very expensive.
Another MACD drawback is its inability to make comparisons between different securities. Because the MACD is the dollar value between the two moving averages, the reading for differently priced stocks provides little insight when comparing a number of assets to each other. The clear transaction signals help minimize the subjectivity involved in trading, and the crosses over the signal line make it easy for traders to ensure that they are trading in the direction of momentum.
Very few indicators in technical analysis have proved to be more reliable than the MACD, and this relatively simple indicator can quickly be incorporated into any short-term trading strategy.
Related Articles. Partner Links. Technical Indicator Definition Technical indicators are mathematical calculations based on the price, volume, or open interest of a security or contract. Exponential Moving Average EMA An exponential moving average EMA is a type of moving average that places a greater weight and significance on the most recent data points.
What is a Death Cross? A death cross pattern is defined as that which occurs when a security's short-term moving average drops below its long-term moving average.
If not, you can be soon! Our latest publication is the definitive reference on this widely followed yet little understood technical indicator. MACD Moving Average Convergence-Divergence is a highly effective and practical trend-following indicator which is widely available on most technical analysis software programs. Traders and investors with this indicator at their disposal would be well advised to learn as much as they can about it and how to use it to improve their trade timing and selection. This comprehensive guide to MACD is a one-of-a-kind one-stop reference that will prove a valuable addition your trading library. This report, written by the originator of this indicator, is the most definitive and in-depth material available on MACD. It alone is worth far more than the modest price of this booklet.
Understanding Macd (Moving Average Convergence Divergence)
The MACD indicator or "oscillator" is a collection of three time series calculated from historical price data, most often the closing price. These three series are: the MACD series proper, the "signal" or "average" series, and the "divergence" series which is the difference between the two. These parameters are usually measured in days. The most commonly used values are 12, 26, and 9 days, that is, MACD 12,26,9.