Friday, February 8, 2008

Moving Average Convergence Divergence (MACD)

The Moving Average Convergence Divergence (usually known by the acronym MACD) is a momentum indicator, that was developed by Gerald Appel in the 1960s. The MACD compares two exponential moving averages, and displays the difference between the moving averages as a single line, with positive and negative values, above and below a zero line (an oscillator). The MACD is displayed on its own chart, separate from the price bars, and is the lower section in the example chart.

Calculation

* Description : The MACD (MACD) is the difference between short term (EMAS) and long term (EMAL) exponential moving averages, and is often used with a signal line that is an exponential moving average of the MACD (EMAMACD).
* Calculation :
EMAS = EMASn-1 + ((2 / (n + 1)) * (Pn - EMASn-1))
EMAL = EMALn-1 + ((2 / (n + 1)) * (Pn - EMALn-1))

MACD = EMAS - EMAL
EMAMACD = EMAMACDn-1 + ((2 / (n + 1)) * (Pn - EMAMACDn-1))

Trading Use

As the MACD is a momentum indicator, it shows positive momentum when it is above the zero line, and negative momentum when it is below the zero line (similar to the Commodity Channel Index (CCI)).

There are many different ways of interpreting the MACD during trading, but the most popular ways (not necessarily the most profitable) include the MACD crossing its signal line and the MACD crossing the zero line. The MACD can also be used as a divergence indicator, with long entries signaled by bullish divergence, and short entries signaled by bearish divergence.

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