Moving Average Convergence/divergence

MACD
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This article is about stock price analysis. For other uses, see MACD (disambiguation).
Example of historical stock price data (top half) with the typical presentation of a MACD(12,26,9) indicator
(bottom half). The blue line is the MACD series proper, the difference between the 12-day and 26-day EMAs of
the price. The red line is the average or signal series, a 9-day EMA of the MACD series. The bar graph shows
the divergence series, the difference of those two lines.
MACD, short for moving average convergence/divergence, is a trading

indicator used in technical analysis of stock prices, created by Gerald Appel in the late
1970s.[1] It is designed to reveal changes in the strength, direction, momentum, and
duration of a trend in a stock's price.
The MACD indicator (or "oscillator") is a collection of three time series calculated from
historical price data, most often the closing price. These three series are: the MACD
series proper, the "signal" or "average" series, and the "divergence" series which is the
difference between the two. The MACD series is the difference between a "fast" (short
period) exponential moving average (EMA), and a "slow" (longer period) EMA of the
price series. The average series is an EMA of the MACD series itself.
The MACD indicator thus depends on three time parameters, namely the time constants
of the three EMAs. The notation "MACD(a,b,c)" usually denotes the indicator where the
MACD series is the difference of EMAs with characteristic times a and b, and the
average series is an EMA of the MACD series with characteristic time c. These
parameters are usually measured in days. The most commonly used values are 12, 26,
and 9 days, that is, MACD(12,26,9). As true with most of the technical indicators, MACD
also finds its period settings from the old days when technical analysis used to be
mainly based on the daily charts. The reason was the lack of the modern trading
platforms which show the changing prices every moment. As the working week used to
be 6-days, the period settings of (12, 26, 9) represent 2 weeks, 1 month and one and a
half week. Now when the trading weeks have only 5 days, possibilities of changing the
period settings cannot be overruled. However, it is always better to stick to the period
settings which are used by the majority of traders as the buying and selling decisions
based on the standard settings further push the prices in that direction.
The MACD and average series are customarily displayed as continuous lines in a plot
whose horizontal axis is time, whereas the divergence is shown as a bar graph (often
called a histogram).
Macd indicator showing horizontal lines
A fast EMA responds more quickly than a slow EMA to recent changes in a stock's
price. By comparing EMAs of different periods, the MACD series can indicate changes
in the trend of a stock. It is claimed that the divergence series can reveal subtle shifts in
the stock's trend.
Since the MACD is based on moving averages, it is a slow indicator lagging indicator.
As a future metric of price trends, the MACD is less useful for stocks that are not
trending (trading in a range) or are trading with unpredictable price action. Hence the
trends will already be completed or almost done by the time MACD shows the trend.
Contents
 1Terminology
 2Mathematical interpretation
o 2.1Classification
 3Trading interpretation
o 3.1Signal-line crossover
o 3.2Zero crossover
o 3.3Divergence
o 3.4Timing
o 3.5False signals
 4See also
 5References
Terminology[edit]
Over the years, elements of the MACD have become known by multiple and often over-
loaded terms. The common definitions of particularly overloaded terms are:
Divergence: 1. As the D in MACD, "divergence" refers to the two underlying moving
averages drifting apart, while "convergence" refers to the two underlying moving
averages coming towards each other. 2. Gerald Appel referred to a "divergence" as the
situation where the MACD line does not conform to the price movement, e.g. a price low
is not accompanied by a low of the MACD. [2] and 3. Thomas Asprey dubbed the
difference between the MACD and its signal line the "divergence" series. In practice,
definition number 2 above is often preferred.
Histogram:[3] 1. Gerald Appel referred to bar graph plots of the basic MACD time series
as "histogram". In Appel's Histogram the height of the bar corresponds to the MACD
value for a particular point in time. 2. The difference between the MACD and its Signal
line is often plotted as a bar chart and called a "histogram". In practice, definition
number 2 above is often preferred.
Mathematical interpretation[edit]
In signal processing terms, the MACD series is a filtered measure of the derivative of
the input (price) series with respect to time. (The derivative is called "velocity" in
technical stock analysis.) MACD estimates the derivative as if it were calculated and
then filtered by the two low-pass filters in tandem, multiplied by a "gain" equal to the
difference in their time constants. It also can be seen to approximate the derivative as if
it were calculated and then filtered by a single low pass exponential filter (EMA) with
time constant equal to the sum of time constants of the two filters, multiplied by the
same gain.[4] So, for the standard MACD filter time constants of 12 and 26 days, the
MACD derivative estimate is filtered approximately by the equivalent of a low-pass EMA
filter of 38 days. The time derivative estimate (per day) is the MACD value divided by
14.
The average series is also a derivative estimate, with an additional low-pass filter in
tandem for further smoothing (and additional lag). The difference between the MACD
series and the average series (the divergence series) represents a measure of the
second derivative of price with respect to time ("acceleration" in technical stock
analysis). This estimate has the additional lag of the signal filter and an additional gain
factor equal to the signal filter constant.
Classification[edit]
The MACD can be classified as an absolute price oscillator (APO), because it deals with
the actual prices of moving averages rather than percentage changes. A percentage
price oscillator (PPO), on the other hand, computes the difference between two moving
averages of price divided by the longer moving average value.
While an APO will show greater levels for higher priced securities and smaller levels for
lower priced securities, a PPO calculates changes relative to price. Subsequently, a
PPO is preferred when: comparing oscillator values between different securities,
especially those with substantially different prices; or comparing oscillator values for the
same security at significantly different times, especially a security whose value has
changed greatly.
Another member of the price oscillator family is the detrended price oscillator (DPO),
which ignores long term trends while emphasizing short term patterns.
Trading interpretation[edit]
Exponential moving averages highlight recent changes in a stock's price. By comparing
EMAs of different lengths, the MACD series gauges changes in the trend of a stock.
The difference between the MACD series and its average is claimed to reveal subtle
shifts in the strength and direction of a stock's trend. It may be necessary to correlate
the signals with the MACD to indicators like RSI power.
Some traders attribute special significance to the MACD line crossing the signal line, or
the MACD line crossing the zero axis. Significance is also attributed to disagreements
between the MACD line or the difference line and the stock price (specifically, higher
highs or lower lows on the price series that are not matched in the indicator series).
Signal-line crossover[edit]
A "signal-line crossover" occurs when the MACD and average lines cross; that is, when
the divergence (the bar graph) changes sign. The standard interpretation of such an
event is a recommendation to buy if the MACD line crosses up through the average line
(a "bullish" crossover), or to sell if it crosses down through the average line (a "bearish"
crossover).[5] These events are taken as indications that the trend in the stock is about to
accelerate in the direction of the crossover.
Zero crossover[edit]
A "zero crossover" event occurs when the MACD series changes sign, that is, the
MACD line crosses the horizontal zero axis. This happens when there is no difference
between the fast and slow EMAs of the price series. A change from positive to negative
MACD is interpreted as "bearish", and from negative to positive as "bullish". Zero
crossovers provide evidence of a change in the direction of a trend but less confirmation
of its momentum than a signal line crossover.
Divergence[edit]
A "positive divergence" or "bullish divergence" occurs when the price makes a new low
but the MACD does not confirm with a new low of its own. A "negative divergence" or
"bearish divergence" occurs when the price makes a new high but the MACD does not
confirm with a new high of its own.[6] A divergence with respect to price may occur on the
MACD line and/or the MACD Histogram.[7]
Timing[edit]
The MACD is only as useful as the context in which it is applied. An analyst might apply
the MACD to a weekly scale before looking at a daily scale, in order to avoid making
short term trades against the direction of the intermediate trend. [8] Analysts will also vary
the parameters of the MACD to track trends of varying duration. One popular short-term
set-up, for example, is the (5,35,5).
False signals[edit]
Like any forecasting algorithm, the MACD can generate false signals. A false positive,
for example, would be a bullish crossover followed by a sudden decline in a stock. A
false negative would be a situation where there is bearish crossover, yet the stock
accelerated suddenly upwards.
A prudent strategy may be to apply a filter to signal line crossovers to ensure that they
have held up. An example of a price filter would be to buy if the MACD line breaks
above the signal line and then remains above it for three days. As with any filtering
strategy, this reduces the probability of false signals but increases the frequency of
missed profit.
Analysts use a variety of approaches to filter out false signals and confirm true ones.
A MACD crossover of the signal line indicates that the direction of the acceleration is
changing. The MACD line crossing zero suggests that the average velocity is changing
direction.
See also

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MACD

From Wikipedia, the free encyclopedia

MACD, short for moving average convergence/divergence, is a trading

Macd indicator showing horizontal lines

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