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Moving Average Convergenc1

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Sunil Jadhav
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19 views

Moving Average Convergenc1

Uploaded by

Sunil Jadhav
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Moving

Average
Convergen
ce-
Divergence
(MACD)

by Mark McRae.
Surefire Trading.
History

Moving Average Convergence-Divergence (MACD) was


originally constructed by Gerald Appel an analyst in New York.
Originally designed for analysis of stock trends, it is now widely
used in many markets.

MACD is constructed by making an average of the difference


between two moving averages. The difference of the original two
moving averages and the moving average of the difference can
be plotted as two lines, one fast and one slow.

Uses

Most modern charting software now includes MACD as standard.


Once selected to display in your charting software it normally
shows up as two lines plotted on an open scale against the zero
line. These two lines will normally be of different color or one line
a solid line and the other a dotted line. Frequently used settings
are 12 and 26 period exponential moving averages with 9 period
exponential moving average as the signal line.

Although there are three moving averages mentioned you will


only see two lines. The simplest method of use is when the two
lines cross. If the faster signal line crosses above the slower line
then a buy signal is generated and vice versa. It is also used as
an overbought and oversold indicator. The higher above the zero
both lines are the more overbought it becomes and the lower
below the zero line both lines are the more oversold it becomes.

It may also lead to a stronger signal if the signal line crosses


down when it is overbought and crosses up when it is oversold.
The last common use of MACD is that of divergence.

If the MACD is making new lows and the price of the security is
not making new lows that is one form of divergence (bullish
divergence). Also, if the MACD has made a high and starts to
head down but price continues up that is another type of
divergence (bearish divergence) and may lead to an indication of
a change in direction.

My Own Use Of MACD

I like to use the MACD as a trend indicator with parameters set at


8 and 18 period exponential moving averages with a 9 period
exponential moving average as the signal line. All I am trying to
do is establish a trend in a higher time period than the one I
intend to trade.

If you were trading day charts you would be looking at the MACD
on the weekly. If you were trading an hourly chart you might look
at the MACD on the daily. As long as the signal line remains
above or below the MACD line on the next higher time frame you
know the trend is still in place.

As you can see from the chart examples of the 30 min Cash
DJIA there was a sell signal on the 9th May 02. This was my
higher time frame as I was trading intraday. I then went to the 5
min chart of the Cash DJIA and sold the rallies, confident to stay
short as long as my higher time period MACD trend in the 30 min
stayed intact. If the 30 min MACD signal line were to cross up I
would have closed all short positions.

30 Min Chart
5 Min Chart

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