Moving Average Convergence Divergence (MACD) as lines

Type

Trend following oscillator that shows the relationship between two moving averages of prices.

History

The MACD, developed by Gerald Appel, is one of the simplest and most reliable indicators available.

How does it work?

The most popular formula for the MACD is the difference between a securities 26- day exponential moving average and its 12- day exponential moving average. A 9-day exponential moving average, called the "signal" (or "trigger") line is then plotted on top of the MACD to show buy/sell opportunities.

The MACD measures the difference between two moving averages. A positive MACD indicates that the 12-day EMA is trading above the 26-day EMA. A negative MACD indicates that the 12-day EMA is trading below the 26-day EMA.

Trading Signals

If the MACD is positive and rising, then the gap between the 12-day EMA and the 26-day EMA is widening. This indicates that the rate-of-change of the faster moving average is higher than the rate-of-change for the slower moving average. Positive momentum is increasing and this would be considered bullish.

If the MACD is negative and declining further, then the negative gap between the faster moving average and the slower moving average is expanding. Downward momentum is accelerating and this would be considered bearish.

The MACD proves most effective in wide-swinging trading markets. There are three popular ways to use the MACD:

MACD centreline crossovers occur when the faster moving average (red line) crosses the slower moving average (blue line). The basic MACD trading rule is to sell when the MACD falls below its signal line. Similarly, a buy signal occurs when the MACD rises above its signal line. It is also popular to buy/sell when the MACD goes above/below zero. See example.

The MACD is also useful as an overbought/oversold indicator. When the shorter moving average pulls away dramatically from the longer moving average (i.e., the MACD rises), it is likely that the security price is overextending and will soon return to more realistic levels. MACD overbought and oversold conditions vary from security to security.

An indication that an end to the current trend may be near occurs when the MACD diverges away from the security. A bearish divergence occurs when the MACD is making new lows while prices fail to reach new lows. A bullish divergence occurs when the MACD is making new highs while prices fail to reach new highs. Both of these divergences are most significant when they occur at relatively overbought/oversold levels

Settings

Sharechart Default:  10 period, 5 period, 5 period

Example

The chart below is of US stock Exxon Mobil Corp.

1.                                          MACD as lines in overbought area and forms bearish crossover price then falls

2.                                          MACD as lines below zero forms bullish crossover share price then rises

3.                                          MACD as lines in overbought area and forms bearish crossover price then falls

4.                                          MACD as lines above zero forms bullish crossover share price then rises

5.                                          MACD as lines forms a bearish divergence & bearish crossover price then falls

6.                                          MACD as lines in oversold area forms a bullish divergence & bullish crossover price then rises

The setting for the MACD as lines indicator for the graph above was 60 periods, 12 periods, and 9 periods. It can be modified by going to Settings > Indicators > MACD as lines.