Moving Average Convergence/Divergence (MACD)

The MACD is a specific type of OSCILLATOR study. It measures the difference between two exponential moving averages of different lengths, in addition, a trailing moving average of the MACD is plotted (MACDA), this is commonly referred to as the “Trigger” line. The two moving averages have different sensitivities to market action, thereby providing an indication of a change in the market environment, such as the emergence of a new trend or a trend reversal. Gerald Appel defined the MACD with its default parameter values.

Calculation

MACD = Exponential MA1 - Exponential MA2

MACDA = Exponential MA of MACD

Characteristics & Usage

The MACD is a simple and effective trend following tool, with the CQG defaults the most common variables used in the market.

When the MACD crosses 0, it indicates the shorter, more sensitive, moving average is crossing over the longer, slower, moving average.

Convergence of the two exponential averages, identified as the MACD moving toward 0, indicates trend termination or consolidation.

An expansion apart between the two exponential averages indicates the shorter/faster average is accelerating away from the longer/slower average. This is associated with a strengthening trend.

The MACD is an unbounded study enabling it to follow the market as long as the trend is gaining momentum.

The MACD generates two types of trading signals:

•      A cross above zero generates a buy signal, while a cross below zero is a sell signal.

•      A cross of the MACD and the MACDA may be used to generate buy and sell signals, as well. This technique can effectively identify the resumption of a trend when the MACD does not cross 0. The distance between the MACD and the MACDA is the basis of the Oscillator Less MA of Oscillator study.

The unbounded nature of the MACD study makes defining specific OB/OS levels difficult. Given this characteristic an MACD should not be traded against simply because it is OB or OS rather one should wait to see deterioration in its behavior. This may be done by paying greater attention to the MACDA. This allows for the study to be used as a divergence based indicator. Due to the fact that it is unbounded in value, it does not have so many problems associated in the Stochastic and the RSI. Namely, placing linear calculations on non-linear data. Studies such as MACD Divergence, which is linked to MACD Steps, can provide further definition in identifying true divergence. The chart shows three arrows on one sell signal which indicates divergence appearing when calculated through the high, low, and close. The single black arrow highlights the powerful and unique signal of divergence as a continuation of an existing trend.

Moving Average Convergence Divergence Parameters