Presentation of the MACD:
The MACD’s correct full name is the ‘Moving Average Convergence Divergence’. This is an indicator created by an editor of the Systems and Forecasts Company, Gerald Appel. It enables the precise analysis of exponential moving averages
For operating purposes, the MACD uses the difference between two exponential moving averages based on the closing prices of an asset. Here it is the moving average of this difference that is interesting.
It is essential to use only the closing price when applying this type of analysis which was originally created to compare the moving averages of 12 and 26 days.
How is the MACD calculated?
The MACD Indicator is calculated, as its name indicates, from the moving average convergence and divergence.
That is to say, this indicator tends to show the existing connection between two moving averages. The result obtained in this way is therefore the difference representation between these two moving averages.
Generally, and by following the traditional calculation scheme, the MACD compares an exponential moving average over 26 days that is called the “long average” with another exponential moving average over 12 days that is called the “short average”.
From the result of this comparison, you can then obtain the purchase or sale signals. On a chart, these signals are represented by a crossing at the top or the bottom of the signal line by the MACD line.
As with most technical indicators, the MACD is displayed visually, on a chart. There are two different types of charts or different views of this indicator:
- The first is shown in the form of a curve which is more generally used for analyses over the medium and long term.
- The second method is displayed in the form of a bar chart and is more particularly used for short term analyses.
Certain traders use both types of display simultaneously but if you wish to use this method then you should take into account that they have different scales.
As it is in the form of a chart, the MACD is an excellent trend indicator. It has the advantage of being based on moving averages thereby making its interpretation even more precise and reliable.
How to use the MACD when trading:
The MACD is a popular indicator for online trading. There are however several different ways to interpret it.
The first method consists of identifying the crossover points between the MACD curve and the signal line. When the MACD curve moves below the signal line it signifies an indication of a drop. However, if the MACD passes above the signal line this indicates a rise. When the crossovers happen during a so called oversell or overbuy zone they are considered as even more reliable indicators.
The other interpretation technique however uses the differences between the price movements and the MACD. To put it simply, it recognises the moments when the MACD curve moves contrary to the signal line.