Name, Sometimes Called:
Moving Average Convergence/Divergence (MACD)
Sometimes called MACD histogram
Brief Description:
MACD is a price-based lagging indicator that relates
two exponential moving averages (EMAs). MACD can be used in three
ways. First, it can suggest buying or selling the issue when MACD
crosses its signal line. Second, the issue's price diverging from
the MACD can be taken as the end of the current trend. Third, the
MACD rising dramatically can be an indication that the issue is
overbought.
Definitions, Formulas:
MACD is a price-based lagging
indicator that relates two price exponential moving averages (EMAs).
One can use the MACD indicator in three ways. One way is as a suggestion
to buy or sell the issue
when its MACD crosses its signal line. A second way is to take the
issue's
price diverging
from the MACD as the end of the current trend. The third way is
to view the MACD's dramatic rise as an indication that the issue
is overbought.
MACD requires the calculation of three EMAs.
The first two smooth the closing price:
EMAslow = EMA(26)(Closing price)
This EMA is a long (slow) period
of 26 days.
EMAfast = EMA(12)(Closing price)
This EMA is a short (fast) period
of 12 days.
Then
MACD = EMAfast
- EMAslow
The third EMA is a signal (trigger) period of 9 days.
MACDsignal = EMA(9)(MACD)
MACDsignal is usually plotted over
the MACD.
Finally,
MACD histogram = MACD - MACDsignal
As can be seen from the calculation, the MACD histogram will be
positive when MACD is above MACDsignal
and negative when MACD is below MACDsignal.
Both MACD and MACD histogram are differences and will be centered
on zero.
Positive Development Calculation:
For this TAI, a new positive development (NPD) occurs
when MACD histogram x+ 0, which is the same as MACD x+ MACDsignal
This TAI is no longer positive when the MACD histogram is lower
than yesterday. However, it returns to being a positive development
if both the MACD histogram rises and MACD x+ MACDsignal.
This TAI is no longer positive when the MACD histogram x- zero.
If this TAI is still positive tomorrow, it will no longer be new,
but will be a cumulative positive development (CPD).
If this TAI was a new positive development (NPD)
yesterday, and is still positive today, then it becomes a cumulative
positive development (CPD).
History:
Gerald Appel, a professional money manager, and publisher
of Systems and Forecasts developed MACD. Systems and
Forecasts is available from www.systemsandforecasts.com.
MACD uses only moving average calculations. The “standard”
MACD uses the 26-day long (slow) period, 12-day short (fast), and
9-day signal (trigger) periods. Appel and others have used other
periods to deal with fast-moving or slow-moving stocks.
Some analysts view MACD as an oscillator. They believe it is most
effective in wide-swinging trading markets. When the MACD rises
sharply, they believe, the security's price is likely overextended
and will soon return to more realistic levels.
Other analysts prefer to view MACD as a trend-following indicator
and attempt to find divergences in chart patterns. For example,
a bearish divergence occurs when the MACD is reaching new lows while
prices fail to reach new lows. Similarly, a bullish divergence occurs
when the MACD is reaching new highs while prices fail to reach new
highs. Such divergences are most significant when they occur at
relatively overbought or oversold levels.
This chart below shows the MACD indicator for IVX. Between 10/19/2005
and 12/2/2005 it turned into a new positive development twice. Each
time it forecast a short term price increase.
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