What it is and how to use it
What is it?
The Moving Average Convergence Divergence (MACD) is a popular trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. The MACD is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA. The result of this calculation is the MACD line. A nine-day EMA of the MACD, called the "signal line," is then plotted on top of the MACD line, which can function as a trigger for buy and sell signals.
Who made it?
The MACD was developed by Gerald Appel in the late 1970s. Appel is a money manager and the author of several books on trading and technical analysis.
How is it calculated?
The MACD is calculated as follows:
MACD Line = 12-period EMA - 26-period EMA
Signal Line = 9-period EMA of the MACD Line
MACD Histogram = MACD Line - Signal Line
Code (ProRealTime)
How do you use it?
The MACD can be used in several ways to identify trends, momentum, and potential reversal points. Common uses include crossovers, divergence, and the histogram.
Crossovers:
MACD Line and Signal Line Crossover: A bullish signal occurs when the MACD line crosses above the signal line, indicating that upward momentum is increasing. A bearish signal occurs when the MACD line crosses below the signal line, indicating that downward momentum is increasing.
Zero Line Crossover: When the MACD line crosses above the zero line, it indicates a bullish trend. Conversely, when it crosses below the zero line, it indicates a bearish trend.
Divergences:
Bullish Divergence: Occurs when the price makes a new low but the MACD makes a higher low, indicating that selling momentum is weakening and a reversal may be imminent.
Bearish Divergence: Occurs when the price makes a new high but the MACD makes a lower high, indicating that buying momentum is weakening and a reversal may be imminent.
Histogram:
The MACD histogram represents the difference between the MACD line and the signal line. A rising histogram indicates increasing bullish momentum, while a falling histogram indicates increasing bearish momentum.
Lookback Periods:
The standard periods for MACD are 12, 26, and 9, but these can be adjusted depending on the trader’s preference and the specific market being traded. Shorter periods can provide more signals but may also lead to more false signals, while longer periods can provide more reliable signals but fewer trading opportunities.
FAQ
Q: What are the best settings for MACD?
A: The default settings for MACD are 12, 26, and 9, representing the short-term EMA, the long-term EMA, and the signal line. You can tweak these settings to fit your trading strategy.
Q: Is MACD good for day trading?
A: MACD can be really useful for day trading! It helps you spot changes in momentum and trend direction. Just make sure to use it with other indicators to confirm your signals.
Q: How does MACD compare to RSI?
A: Both MACD and RSI are great for tracking momentum, but they do it in different ways. MACD looks at the relationship between two moving averages, while RSI measures the speed and change of price movements. Depending on how you trade, you might find one more useful than the other.
Strategies using the MACD indicator
None so far.