One of the most widely used trend indicator by stocks
traders is the Moving Average Convergence/Divergence or MACD.
It was created by
Gerald Appel during the late 1970’s. His firm, Signalert Corporation, is the
publisher of the technical newsletter, Systems and Forecast.
MACD uses two exponential moving average indicators, usually
a 12-day EMA and a 26-day EMA.
Getting the difference of both of these
exponential moving averages will result into a momentum oscillator which is the
MACD line. Another line using the 9-day Exponential Moving Average of MACD is
plotted to act as a signal line. Signals are taken when MACD crosses this 9-day
EMA signal line.
In Fig. 1 below shows the MACD line in red color while its
9-day EMA signal line was in blue color.
A MACD Histogram was also plotted to
represent the difference between the MACD Line and its signal line.
When the MACD Line is below its signal line, the Histogram
is negative, while when the MACD Line is above its signal line, the histogram
is positive.
As a stock market trading tool, go SHORT when MACD crosses
from above to below its signal line (1) coming from a large swing. Go LONG when MACD crosses its signal line
coming from below to above its signal line (2) coming from a large swing.
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| Fig. 1 MACD |