Moving Average Convergence/Divergence
by Thom Hartle
The moving average convergence/divergence (MACD) method was developed by Gerald Appel as a
technique to signal trend changes and indicate trend direction. The procedure uses the difference between
two exponentially smoothed price data, called the MACD line, and an exponentially smoothed series of
this difference, which is called the signal line.
An exponential smoothing of price data has the advantage of responding quickly to price changes while
smoothing data in a consistent manner. The calculation of a exponentially smoothed moving average
(EMA) is simple. You start with the difference between today's closing price and yesterday's EMA.
Multiply this difference by a constant, then add this value to yesterday's EMA. This is today's EMA value.
The constant is from the equation 2/(n+1) where n is selected to produce a constant that will approximate
n days of a simple moving average. For example, if you want the EMA to simulate a nine-day moving
average you would use n = 9, 2/(9+1) = 0.20 as the constant.