MACD – Moving Average Convergence and Divergence
MACD is another form of a dynamic indicator that follows a particular trend. It states that two moving averages are inter related.
The MACD technical indicator is basically the divergence between two particular moving averages, the one whish has 26 periods and the other has 12 periods of Exponential Moving Average. While predicting the buying and selling opportunities a line of signal is used. It is usually a moving average indicator showing 9 periods. Then it is plotted on MACD chart.
The MACD has been regarded as the most efficient one in case of greater fluctuations in the trade market. There are 3 major ways of using MACD:
Crossovers
MACD follows a general rule of trading, which says that when the it is the best to sell off when the MACD is at the bottom of the line of signal. In the same way, the best time to buy is when the MACD is above its line of signal. It is preferred to either buy or sell when the MACD is greater than or less than zero.
Conditions of overbought and oversold
MACD is used as over bought and oversold indicator. As the lesser moving average shifts away from the higher moving average, which indicates a rise in MACD, it is assumed that the price of security is going overboard and will slip down to its practical level very soon.
Divergence
With the divergence of MACD from security it is predictable that the present trend is about to come to an end. When MACD reaches new highs which the price cannot meet, then it is noted as bullish MACD. Whereas, when the MACD reaches its new lows and price cannot follow the same it is known as bearish divergence. The divergences are both significant when it takes place at overbought and oversold situations.
MACD calculation:
The value of difference between moving averages of 26 periods and 12 periods respectively results in the MACD. Then a simple moving average of 9 periods is plotted on the MACD chart in the dorm of dotted lone.
MACD = EMA (CLOSE, 12)-EMA (CLOSE, 26)
SIGNAL = SMA (MACD, 9)
Where
EMA stands for Exponential Moving Average;
SMA stands for Simple Moving Average;
SIGNAL stands for signal line of the indicator.
OsMA or Moving Average of Oscillator
The subtracted value of the oscillator from the oscillator smoothing is the value of Moving average of the oscillator. Here the oscillator is denoted by the MACD base line and smoothing is denoted by the MACD line of signal.
OsMA=MACD- line of signal
This entry was posted on Friday, July 25th, 2008 at 11:37 am and is filed under metatrader indicator. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.
