Moving Average Convergence/Divergence (MACD)
A technical analysis tool used for more than thirty years
Invented by Gerald Appel during the late 1970’s, MACD has become one of the most popular technical indicators employed by securities traders to assess the timing of buy or sell decisions. Gerald Appel's MACD is included on virtually every stock charting program on the internet (e.g. yahoo!finance, bigcharts.com, stockcharts.com etc).
MACD CalculationThe MACD line is created by subtracting a slower exponential moving average* from a faster exponential moving average, of closing prices of a security. The difference, or MACD line, is charted over time, as well as a moving average of the difference called the signal line. A histogram (bar chart) is conventially shown of the difference between the MACD line and the signal line.
(*an exponential moving average weights recent data more heavily than older data, in a series of data points. As a general rule, the longer term moving average will have two to three times the number of data points as the shorter term average. The 12 – 26 combination of units averaged is widely employed, with a signal line of 9 units.)
When trends are favorable for the stock being charted, the MACD line will be above 0, preferably rising. When trends are unfavorable, the MACD line will be below 0, declining.
Buy or Sell Criteria
The basic MACD trading rule is to sell when the MACD line falls below its signal line, and to buy when the MACD rises above its signal line.
Other Basic MACD Assumptions:
- When market trends are improving, short term averages will rise more quickly than long term averages. MACD will turn up.
- When market trends are losing strength, shorter term averages will tend to flatten, ultimately falling below longer term
averages if declines continue. MACD lines will fall below 0.
- Weakening trends are reﬂected in changes of direction of MACD readings, but clear trend reversals are not usually considered
as conﬁrmed until other indications take place.
- During the course of price movements, short term moving averages will move apart (diverge) and move together (converge) with
longer term moving averages – hence, the indicator name, “moving average convergence – divergence”.
- Inasmuch as stocks tend to decline at roughly twice the rate they rise,
It is often useful to employ faster MACD pairings for buying and slower
pairings for selling.
- MACD is a very useful, but not a perfect indicator. During strongly
trended markets, it sometimes does signal prematurely.
For a more detailed description of the MACD, read Gerald Appel's "Technical Analysis, Power Tools for Active Investors."
Gerald Appel is Chairman of Signalert Corporation and author of more than 10 books on investing. Please read our disclaimer.