Moving Average Convergence Divergence (MACD)

Characteristic:
Trend Direction
Parameter Defaults:
First EMA Period
12
controls the measurement period for the short average

Second EMA Period
26
controls the measurement period for the long average

Signal EMA Period
9
controls the measurement period for the signal average
Plots:
MACD
The MACD line

MACD_Signal
The signal line for MACD

MACD_Hist
The spread between the MACD and Signal
The MACD indicator was developed by Gerald Appel and is simply a method of identifying the potential for two exponential moving averages to cross. MACD is calculated using a short length and a long length exponential moving averages (defaulted to 12 and 26) and calculating the difference between these two averages. In other words, it is the spread between the two averages. A signal line is then derived by calculating an exponential moving average of the MACD. This is plotted as the MACD Signal. Finally, the difference between the MACD and the MACD Signal is calculated and plotted in a histogram as the MA Hist.
The MACD is often used as a trend-following indicator, and may be interpreted similarly to other moving averages. That is, when the MACD crosses above the MACD Signal, an uptrend may be beginning, indicating a buy signal. Similarly, when the MACD crosses below the MACD Signal, a downtrend may be beginning. As an oscillator, the MACD can signal overbought and oversold conditions though there is no method to identify overbought and oversold conditions.
However it must be noted that while MACD is often used as a trending indicator, when price direction slows it will result in the spread between the two exponential moving averages reducing, thus causing the MACD line to decline in the case of an uptrend or rise in the case of the down trend. This will cause losses if MACD is utilized for crossovers of MACD line across the Signal line.




The point A displays and example of how MACD can rise even though for a while both averages are declining, but the spreads is narrowing. A similar event occurs at point B where it can be seen that MACD is diverging against price while both averages are pointing lower. Note at point C how the MACD Hist is displaying a slowing of the rise in the spread between MACD and Signal and on a break of the trend line price reverses lower.Finally, Point D gives another example of a bullish divergence between MACD and price.

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