Moving Average Convergence Divergence Indicator

The moving average convergence divergence indicator (MACD) was created in 1960 by Gerald Appel. This technical analysis indicator is one of the most reliable indicators available in Forex. MACD is calculated as a difference between two exponential moving averages. One of the exponential moving averages is slow, usually it’s used a 26 day exponential moving average, and the other is much faster, like the 12 day exponential moving average, so the formula of MACD looks like this:

MACD = EMA [12] of price - EMA [26] of price

Although uses moving averages that are slow, the MACD indicator its faster than moving averages and is used as a recent trend indicator. MACD shows when the short term oscillations of the price go up or down much faster than the long term average.

The 12 day and 26 day MACD formula is the most common used formula in technical analysis. Using longer exponential moving averages will produce a slower indicator but using shorter exponential moving averages will produce a quicker and more responsive indicator. The closing prices of every day are used to form the exponential moving averages.

MACD indicator can be used in daily, weekly or monthly charts. For weekly charts is recommended to use a faster set of exponential moving averages and for volatile stocks may be appropriate a slower set of exponential moving averages to help smoothing the data. The weekly and daily chart MACD indicator will have more lag than the monthly charts.

If the MACD is positive that indicates that the 12 day exponential moving average is above the 26 day average. This indicates a bullish signal suggesting that the price will go up. If the MACD in negative means that the faster moving average is below the slower moving average. This translates into a bearish period of trading so it might be the time to sell.

One of the major advantages is that the MACD indicator incorporates aspects of both trend and momentum. Another positive aspect is that using exponential moving averages some of the lag is eliminated and following the trend the indicator will not be wrong for a long time.

In order to speed up the signals of the MACD Thomas Aspray developed in 1986 the MACD Histogram. This way he managed to find a way to eliminate more lag. The MACD Histogram is build like a difference between the MACD and a trigger line like the 9 day exponential moving average.  This difference represented like a histogram makes centerline crossovers and divergences easier to identify.

If the MACD value is higher than the 9 day exponential moving average the MACD Histogram will be positive and if is lower the MACD Histogram will be negative. Sharp ups or downs in the MACD Histogram indicate that the bullish (ups) or bearish (downs) momentum are increasing.