What is MACD(Moving Average Convergence/Divergence) Indicator?
Contents:
What is MACD indicator?
MACD (Moving Average Convergence/Divergence) is a trend-following momentum indicator proposed by Geral Appel in 1979. It is extremely popular in technical analysis. Developed from dual moving averages, MACD can be used to identify aspects of an asset’s overall trend.
First, MACD employs two Moving Averages of varying lengths (which are lagging indicators) to identify trend direction and duration.
Then, MACD takes the difference in values between those two Moving Averages (MACD Line) and an EMA of those Moving Averages (Signal Line) and plots that difference between the two lines as a histogram that oscillates above and below a center Zero Line.
The histogram is used as a good indication of a security’s momentum. MACD can remove the frequent false signal defects of the MA line and ensure the maximum result of the moving average.
Calculation:
The Moving Average Convergence Divergence (MACD) usually consists of three parts:
1. The MACD line is the result of subtracting the short-term EMA from the long-term EMA. It is also called the difference value (DIF).
- MACD Line: (12-day EMA – 26-day EMA)
- In layman’s terms, MACD turns two trend-following indicators (i.e. moving averages) into a momentum oscillator. It identifies trends by filtering out daily price fluctuations. The most commonly used values are 26 days for the long-term EMA and 12 days for the short-term EMA.
- MACD line reacts relatively quickly to price changes.
- MACD has no highest and lowest values.
- MACD shows the relative speed of price changes, not the speed itself.
2. The signal line is the exponential moving average of DIF, generally called DEA.
- Signal line: 9-day EMA of MACD line
- Signal line is the EMA value of the MACD line. 9 is the period length EMA used in the most common signal lines.
- Signal lines are usually slow to react to price changes.
3. MACD histogram, its value is the difference between DIF and DEA.
- MACD Histogram: MACD Line – Signal Line
- Over time, the divergence between the MACD line and the signal line will constantly change. The MACD Histogram plots this difference into an easy-to-read histogram. The difference between the two lines oscillates around the zero line.
Applied rules
The MACD indicator is generally useful for identifying three types of fundamental signals: Signal Line Crossovers, Zero Line Crossovers, and Divergences.
- Signal Line Crossovers
- Bullish Signal Line Crossovers
- Bullish Signal Line Crossovers occur when the MACD Line crosses above the Signal Line.
- Bearish Signal Line Crossovers
- Bearish Signal Line Crossovers occur when the MACD Line crosses below the Signal Line..
- Zero Line Crossovers
- Bullish Zero Line Crossovers
- Bullish Zero Line Crossovers occur when the MACD Line crosses above the Zero Line and go from negative to positive.
- Bearish Zero Line Crossovers
- Bearish Zero Line Crossovers occur when the MACD Line crosses below the Zero Line and go from positive to negative.
- Divergences
Divergences refer to the situation where the MACD and the actual price are not in agreement.
- Bullish Divergences occur when the price records a lower low while the MACD records a higher low.
- Bearish Divergences occur when the price records a higher high and the MACD records a lower high.
The magics of MACD
MACD developed according to the principle of moving average not only removes the defect of frequent false signals of moving average, but also retains the effect of moving average. The MACD indicator has the characteristics of moving average trend, stability, and stability. It is a technical analysis indicator used to judge the timing of buying and selling assets and predict the rise and fall of asset prices.
MACD is two indicators in one, which is what makes it a valuable tool in technical analysis. Not only can it help identify trends, but it can also measure momentum. It takes two separate lagging indicators and adds an aspect of momentum, which is more positive or predictive. This versatility is why it continues to be used by traders and analysts across the financial spectrum.
The limitations of MACD
It is generally believed that MACD is more suitable for the study and judgment of medium and long-term trends, and the guidance of short-term trends is weak.
The MACD indicator is very simple and practical, but it still has some drawbacks. Since the moving average measures the price changes of assets in the previous period of time, for short-term large price changes, MACD will not immediately generate a signal, and there will be a certain lag.
Therefore, when using the MACD indicator to make signal judgment and transaction judgment, it should also be combined with other indicators to make a comprehensive judgment.
References:
https://www.tradingview.com/scripts/macd/
https://www.tradingview.com/scripts/macd/?solution=43000502344