The Moving Average Convergence/Divergence (MACD for short) is one of the more popular indicators for traders. It was developed by Gerald Appel in 1979 and is used to determine when trends are strong or beginning to fade.
The MACD indicator is usually made up using three plots – the MACD, the SignalLine, and the MACDHisto (sometimes called Divergence).
Here is how the MACD is created:
- MACD = the difference between two exponential moving averages – typically using the 12 and 26 periods.
- SignalLine = the 9 period exponential moving average of the MACD
- MACDHisto = the difference between the MACD and SignalLine
The MACD and MACDAvg are plotted using simple lines whereas the MACDHisto uses and histogram as shown below:
In the chart above, you will see that the MACD line crosses above or below the zero line whenever the 12 EMA crosses above or below the 26 EMA. Likewise, the MACDHisto crosses above or below the zero line when the MACD crosses above or below the SignalLine. Using these signals along with the direction the MACD is pointing can imply when the market is about to reverse directions.
The MACDHisto is also thought of as Divergence. Note the chart below that when price makes a new high or low and the MACDHisto fades instead, this is a signal of a change in direction.
Have you tried the MACD in your trading strategies successfully? Do you like to use the traditional 12, 26, 9 periods or do you have your own? As always, I welcome your comments.