Find out about technical analysis of different indicators applied to the S&P 500, NASDAQ 100 and DJI to create trading systems for stocks and options trading.
MACD (Moving Average Convergence / Divergence) is one of the most popular studies in the technical analysis. Created by Gerald Appel in the 1960s this indicator reveals the shorter-term trend changes in relegation to the longer-term trend. The MACD formula is simple:
MACD = EMA1 – EMA2
Where EMA1 is a fast moving average that reflect shorter-term trend and EMA2 is a slow moving average that reflects longer-term trend. MACD is always used in a combination with a signal line which is exponential or simple moving average applied to MACD line. The signal line is used to smooth MACD and generate signals on its crossovers with MACD.
One of the most used settings for MACD is 12 for EMA1, 26 for EMA2 and 9 for signal line. Still this setting is not always fit to trading needs of all traders; therefore, the setting could vary depending on a trader's personal trading style.
The difference between the MACD and signal line forms the Histogram which was first used in 1986 by Thomas Aspray.
In technical analysis MACD is considered as a trend following indicator and is used to generate signals as well as to confirm a trend. There are three basic ways of using this indicator.
The first way of using MACD is to look for its crossovers with zero line. Positive MACD confirms an up-trend and negative MACD confirms down-trend. Thus, when this indicator drops below zero line it could be considered as a signal to sell short and when it raises above zero line it could be considered as a signal to buy long.
The second way of using MACD is to trade it and Signal Line crossovers. This is the same as to look for MACD Histogram and zero line crossovers. The technical analysis says that when MACD crosses signal line on its way down it signals selling and when it crosses signal line on its way up it signals buying.
The third way of using MACD is to define moments of divergence between price and MACD. In particular, a buy signal could be generated when price makes new low, yet MACD stays above its previous lowest point. Controversially, a sell signal could be generated when price makes new high, yet MACD stays below its previously hit high level.
Despite the fact that MACD is one of the oldest studies in technical analysis, as many other studies it generates fake signals. Furthermore, it is recommended to use it in junction with other indicators. Since MACD is price based indicator it could be a good choice to use volume based indicators to complete a trading system that uses MACD analysis.
- Related Articles
- Related Q&A
- Easy Profits by Moving Averages Trading - Part 1
- Forex Basic: MACD
- Moving Averages Analysis
- MACD (Moving Average Convergence Divergence) in Forex Trading
- A Different Type of Moving Average Cross
- ES Emini: Often Misused, the MACD Can Put Money in Your Pocket
- Commodity Trading - What is the MACD Histogram
- More on Moving Averages and a Lesser Known Indicator for Stockmarket Traders
How to Pick a Mutual Fund Family on Performance
By: Steven Kinney | 30/12/2009Stop chasing the lastest, hot mutual fund and check out the performance of mutual fund families.
Mutual Funds Are the Way to Go for IRA-401K Funding
By: Steven Kinney | 30/12/2009Mutual funds are the way to go to fund your IRA or 401K plan. The next 3-5 years should be ripe for investing in company stock.
What is a Commercial Leasing Agreement?
By: Sanjana Sharma | 30/12/2009Now when you have thought of it, it is crucial to understand, practically and legally speaking, the oceanic depth of commercial leasing. These are long- term bindings. There are few points that you should know about any lease.
Managing Investment Risk
By: Michael Ramsay | 30/12/2009Smart investing includes risk management; however, most people focus on how much money they can make without paying attention to strategically analyzing risk. It is important for an investor to fully understand the concept of risk before embarking on an investment plan and to implement certain safeguards to ensure their success rate is increased.
Buy Bullion for a Golden Future - Investing in Gold and Silver Bullion
By: Michiel Van Kets | 30/12/2009Precious metals have always been sound investments and the world financial situation makes buying gold and silver bullion the smartest investment you can make today. If you want the ultimate insurance policy for the future, buy gold and silver bullion.
The U.S. Government provides inside information in the commodity markets
By: chris | 30/12/2009The U.S. Government provides inside information in the commodity markets and you can find out what the insider informationm is if you know how and where to look. Anyone interested in learning more is eligible.
Now the Small Investor Can Make 100 Percent on Their Money
By: Steven Kinney | 30/12/2009Now there are traders that offer auto traded accounts of their programs that average 100% - 300% returns annually.
Day Traders can make $500.00 to $1000.00 per day
By: Steven Kinney | 30/12/2009Read about making money day trading and various programs that call out live trades as they happen for you to follow.
Analysis of Moving Averages
By: Viktor Ko | 18/11/2009 | InvestingMoving average is a basic tool that is used as a foundation for majority indicators in the technical analysis. Even if a trader does not use moving averages directly in his/her analysis most likely they are used as a component of other technical studies in his/her analysis.
Online Trading System
By: Viktor Ko | 18/11/2009 | InvestingThe question is how can a trader choose the right one from such vast number of the online options advisory services available. Below you will find simple questions that should be answered before subscribing and dedicating your money to a particular online trading system.
Moving Average Convergence/Divergence
By: Viktor Ko | 26/10/2009 | InvestingMacd is one of the most used studies in the technical analysis was introduced to the world of traders in 1960th and represent the difference between two exponential moving averages. This indicator is used to generate trading signals as well as to confirm a trend.
Stop-Loss Trading Strategy
By: Viktor Ko | 29/09/2009 | InvestingDeveloping of a stop-loss trading strategy is one of the most important question in the trading life of every active trader. A correctly developed trading strategy helps to protect earned profit and to avoid dramatic losses that could wipe out all investments. There are several factors that define the main rules by which a stop-loss trading strategy is developed.
Stop-Loss Trading Strategy
By: Viktor Ko | 29/09/2009 | InvestingDeveloping of a stop-loss trading strategy is one of the most important question in the trading life of every active trader. A correctly developed trading strategy helps to protect earned profit and to avoid dramatic losses that could wipe out all investments. There are several factors that define the main rules by which a stop-loss trading strategy is developed.
S&P Sector Indexes
By: Viktor Ko | 29/09/2009 | InvestingStandard & Poors track number of the S&P 500 sub-indexes that cover different industrial sectors and groups and called S&P 500 Select Sector indexes. Each Select Sector index has Select Sector SPDRs fund that tracks its performance. All SPDR funds are Exchange Traded Funds which mean that they have all characteristics of mutual funds and could be traded as stocks.
Leading and Lagging Indicators
By: Viktor Ko | 09/07/2009 | InvestingThere are two basics types of technical studies in the analysis of the stock market: leading indicators and lagging indicators. However there exist the third group of technical indicators (informational indicators) that do not belong to the none of the above.
Toronto Stock Exchange
By: Viktor Ko | 09/07/2009 | InvestingToronto Stock Exchange is the oldest and the biggest stock exchange in Canada. The performance of this exchange is tracked by S&P TSX index (Standard & Poors Toronto Stock Exchange Composite Index).