as Moving Average Convergence/Divergence

Introduction

     MACD is one of the most popular and most simple trendfollower/momentum indicator. The mathematical formula is quite simple: average of two different period moving average.

Usually, the 12-day exponential MA is divided with the 26-day exponential MA, and an additional 9-day EMA is also plotted on the chart to improve the signalling of the indicator.

     MACD is most effective when used in trending, swing markets. It's not advised to use when the volatility is high and/or its a ranging market. Created by Gerald Appel in the late 1970s.

Crossovers

     The most widely used signal of MACD. When MACD rises above the signal line (9 EMA) a long position is advised to take, and vica versa for shorts. The stronger the signal, the cross occurs far more from level Zero.

     It's also popular to buy when a move occurs from positive to negative (bearish signal) and from negative to positive (bullish signal).

Overbought/oversold conditions

     When the lower period MA rises to a much higher level, but the higher period MA does not, it's expected that the price will come back to a more realistic level. (which is why lower period MA reacts to market movements more faster, while higher period MA does not)

     It's really subjective at what level you consider MACD overbought/oversold.

Divergence

     MACD divergence is when MACD is not in confirmation to the price action. Assume the price is going down and there is new swing low but MACD does not make a new one. Following icture says it all.

Be aware! Real-time, divergence signals can be false quite frequently, although at past time charts it beautifully appears.

Difference between MACD Histogram and the price could be see. Everytime a difference is forming like this, we recognise it as a divergence trade.

(Written by Stockwalker 19^th of June)