BROWSE

MACD – Moving Average Convergence Divergence

MACD - Moving Average Convergence Divergence

The MACD is a stock market indicator that plays a crucial part in the technical analysis of the market. The MACD is basically the study of price graphs in order to recognize trends and to predict the developments in the market. Showing the relationship between moving averages, this method is widely used to check for signals highlighting the ideal periods of buying and selling.

Basic Concepts in MACD

The MACD is the difference of moving averages in the courses, and its curve is plotted on the graph of the evolution of the course - by setting a zero line of the MACD. Developed by Gerald Appel, it instantly calculates the difference between a short-term exponential moving average and long-term exponential moving average (generally 26 and 12 periods). The first curve is a simple oscillator of exponential moving averages called fast MACD line and then added on the same chart; a second curve called a 'signal line' represents an exponential moving average for period 9 of the first curve.

The succession crossings and therefore convergence-divergence moving averages gave the name of this oscillator: moving average convergence divergence.

Interpretation

Analysis of the MACD can anticipate market developments technically. Thus, it is recommended to buy when the fast MACD curve cuts the slow signal line upwards. It identifies the changes in the balance of power between bullish and bearish. Conversely, the downward crossing of the signal by the slow curve fast MACD is a sell signal. When you notice a dramatic rise in the MACD, it is a signal that there is an overbought of security and it will return to the normal levels soon. Traders also keep a look out on the short and long term average by keeping an eye on the movement below and above the zero line.

This stock market indicator is frequently used by analysts as it provides dynamically price trend signals, and more reactively than other methods used, for example, the crossing of two moving averages (typically 20 to 50 days). Obviously, the MACD cannot be a panacea for every type of trend. It is not really suitable for short-term investments (trading for the day), and must be complemented with other analyses.

It may be necessary to correlate the signals from the MACD with that of powers of indicators such as RSI. Today, the MACD has many variations for refining the divergences and convergences of the two moving averages as is the case of zero MACD lag.


Further Reading


Technical analysis and the London stock exchange: testing the MACD and RSI rules using the FT30
www.tandfonline.com [PDF]
… Neftçi (1991) showed that when economic time series are assumed to be Gaussian, market indicators cannot help to predict future prices … Table 3. The returns of the MACD rule … International Journal of Finance and Economics, 2: 319–31 …

Technical analysis and the Spanish stock exchange: testing the RSI, MACD, momentum and stochastic rules using Spanish market companiesTechnical analysis and the Spanish stock exchange: testing the RSI, MACD, momentum and stochastic rules using Spanish market companies
www.tandfonline.com [PDF]
… Neftçi (1991) showed that when economic time series are assumed to be Gaussian, market indicators cannot help to predict future prices … Table 3. The returns of the MACD rule … International Journal of Finance and Economics, 2: 319–31 …

Application of MACD and RVI indicators as functions of investment strategy optimization on the financial marketApplication of MACD and RVI indicators as functions of investment strategy optimization on the financial market
hrcak.srce.hr [PDF]
… Neftçi (1991) showed that when economic time series are assumed to be Gaussian, market indicators cannot help to predict future prices … Table 3. The returns of the MACD rule … International Journal of Finance and Economics, 2: 319–31 …

Stock market efficiency and the MACD. Evidence from countries around the worldStock market efficiency and the MACD. Evidence from countries around the world
www.sciencedirect.com [PDF]
… Neftçi (1991) showed that when economic time series are assumed to be Gaussian, market indicators cannot help to predict future prices … Table 3. The returns of the MACD rule … International Journal of Finance and Economics, 2: 319–31 …

Revisiting the Performance of MACD and RSI OscillatorsRevisiting the Performance of MACD and RSI Oscillators
www.mdpi.com [PDF]
… Neftçi (1991) showed that when economic time series are assumed to be Gaussian, market indicators cannot help to predict future prices … Table 3. The returns of the MACD rule … International Journal of Finance and Economics, 2: 319–31 …

Efficacy of Refined MACD Indicators: Evidence from Indian Stock Markets.Efficacy of Refined MACD Indicators: Evidence from Indian Stock Markets.
search.ebscohost.com [PDF]
… Neftçi (1991) showed that when economic time series are assumed to be Gaussian, market indicators cannot help to predict future prices … Table 3. The returns of the MACD rule … International Journal of Finance and Economics, 2: 319–31 …



Q&A About MACD – Moving Average Convergence Divergence


When was this method developed?

Gerald Appel developed this method in 1978.

What is the MACD?

The MACD is a stock market indicator that plays a crucial part in technical analysis of the market.

What does the MACD measure?

The MACD measures price graphs to recognize trends and predict developments in the market.

Who created this oscillator called Moving Average Convergence Divergence (MACD)?

Gerald Appel created this oscillator called Moving Average Convergence Divergence (MACD).

Why should you be careful about dramatic rise in these two curves, especially when they are crossing each other?

You should be careful about dramatic rise in these two curves, especially when they are crossing each other because it indicates overbought security and it will return to normal levels soon.

What is plotted on a graph of an evolution of a course?

A zero line of the MACD curve is plotted on a graph of an evolution of a course.

How do you interpret signals given by these two curves when they cross each other?

You interpret signals given by these two curves when they cross each other as buy or sell signals depending upon which line crosses over which one first.

How does one calculate the difference between moving averages?

One calculates the difference by subtracting exponential moving average from another exponential moving average.

What are two curves used with this oscillator called Moving Average Convergence Divergence (MACD)?

Two curves are used with this oscillator called Moving Average Convergence Divergence (MACD) - fast and signal lines.