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MACD

MACD

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Understanding MACD: Moving Average Convergence Divergence
Understanding MACD: Moving Average Convergence Divergence

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Published by: Christopher Michael Quigley on May 17, 2011
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Moving Average Convergence Divergence (MACD)
Christopher M. Quigley B.Sc., M.M.I.I., M.A.
 Developed by Gerald Appel, MACD is one of the simplest and most reliable indicators available.MACD uses moving averages, which are lagging indicators, to include some trend followingcharacteristics. These lagging indicators are turned into a momentum oscillator by subtractingthe longer moving average from the shorter moving average. The resulting plot forms a line thatoscillates above and below zero.The most popular formula for the standard MACD is the difference between a stock's 26-day and12-day exponential moving averages. However Appel and others have since tinkered with theseoriginal settings to come up with a MACD that is better suited for faster or slower securities.Using shorter moving averages will produce a quicker, more responsive indicator, while usinglonger averages will produce a slower indicator.
What does MACD do?
 MACD measures the difference between two moving averages. A positive MACD indicates thatthe 12-day EMA (exponential moving average) is trading above the 26-day EMA. A negativeMACD indicates that the 12-day EMA is trading below the 26-EMA. If MACD is positive andrising, then the gap between the 12-day EMA and the 26-day EMA is widening. This indicatesthat the rate-of-change of the faster moving average is higher that the rate-of-change for theslower moving average. Positive momentum is increasing and this would be considered bullish.If MACD is negative and declining further, then the negative gap between the faster movingaverage and the slower moving average is expanding. Downward momentum is accelerating andthis would be considered bearish. MACD centreline crossovers occur when the faster movingaverage crosses the slower moving average. One of the primary benefits of MACD is that it doesincorporate aspects of both
momentum
and
trend
in one indicator. As a trend followingindicator, it will not be wrong for long. The use of moving averages ensures that the indicatorwill eventually follow the movements of the underlying security.As a momentum indicator, MACD has the ability to foreshadow moves in the underlying stock.MACD divergences can be a key factor in predicting a trend change. For example a negativedivergence on a rising security signifies that bullish momentum is wavering and that there couldbe a potential change in trend from bullish to bearish. This can serve as an alert for traders andinvestors.In 1986 Thomas Aspray developed the MACD
histogram
in order to anticipate MACDcrossovers. The MACD histogram represents the difference between MACD and the 9-day emaof MACD. The plot of this difference is presented as a histogram, making centreline crossoversand divergences more identifiable. Sharp increases in the MACD histogram indicate that MACDis rising faster than the 9-day ema and bullish momentum is strengthening. Sharp declines in theMACD histogram indicate that the MACD is falling faster that its 9-day ema and bearishmomentum is increasing. Thomas Aspray recognised the MACD histogram as a tool to

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