MOVING AVERAGE CONVERGENCE / DIVERGENCE (MACD)

MACD stands for Moving Average Convergence / Divergence and was developed by Gerald Appel. It is one of the simplest and most reliable indicators available at the disposal of technical analyst. Basically MACD uses moving averages which are the lagging indicators and are turned into a momentum oscillator by substracting the longer moving average from the shorter moving average. The net resulting plot forms a line that vibrates or oscillates above and below the zero without any lower or upper limits.

The MACD is based upon the principals of moving average and is calculated by taking the difference between two exponential moving averages of different periods. Popularly the practice followed by technical analysts world over is to compare a 26 day EMA with a 12 day EMA

Of the two moving averages that make up MACD, the 12-day EMA is the faster and the 26-day EMA is the slower. Closing prices are used to form the moving averages. Usually, a 9-day EMA of MACD is plotted along side to act as a signal line for basis of interpretation. A bullish crossover is considered when MACD moves above its 9-day EMA and a bearish crossover is considered when MACD moves below its 9-day EMA.

Interpretation and use of MACD

A buy signal is suggested when the MACD crosses over from below the signal and rises above the signal. Vice Versa, a sell signal is suggested when the MACD crosses over from above the signal and goes below it.

A buy signal is suggested when the MACD cross the zero point and moves from below the zero point to the above zero point. Vice Versa, a sell signal is suggested when the crossover from above the zero point to drop below it is there.

The sharpness of movement up or down of the MACD the strength of the signal is considered more stronger.