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TOPIC :

MOVING AVERAGE CONVERGENCE DIVERGENCE (MACD)

A.

Formulation of MACD

B.

Signals & Applications

C.

1.

Trend Signals

2.

Trading Signals

3.

Divergence Signals

Strength & Weakness

MACD
Uses

Closing price

Originator

Gerald Appel of Signalert Corporation, New York.

Formulation
o

MACD

The difference between the 12-period EMA and 26-period EMA


of closing price.

Signal Line

A 9-period EMA of the MACD.

MACD Signals
o

Trend indication - MACD (not Signal line) crossing equilibrium.

Basic trading signals


Buy : MACD crossing above Signal line.
Sell : MACD crossing below Signal line.

Divergence between MACD and price.

MACD Strength/Weakness
o

Excellent for monitoring trending moves.

MACD/Signal Line crossover not as sensitive to monitor retracement moves.

DIVERGENCE

Definition :

When price and an indicator are heading in opposite directions.


o

In an uptrend, when price is reaching HIGHER HIGHS, indicator


is attaining only LOWER highs.
(In an uptrend, focus on the highs.)

In a downtrend, when price is reaching LOWER LOWS, indicator


is achieving HIGHER lows.
(In a downtrend, focus on the lows.)

Implication :

Price may REVERSE previous trend, or at least retrace.

Strength :

It provides advance signal of a change in trend or at least a retracement in price.

Weakness :

The divergence may not lead to any significant price move if a trend is strong.

Variation :

Three-point divergence.

Application of divergence :

Happens in several oscillators - MACD, RSI, Momentum,


Stochastics, etc.