V.12:2 (81-85): The MACD Momentum Oscillator by Barbara Star, Ph.D.

V.12:2 (81-85): The MACD Momentum Oscillator by Barbara Star, Ph.D.
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The MACD Momentum Oscillator by Barbara Star, Ph.D.

The moving average convergence/divergence (MACD) is one of the most popular indicators around. Here, Barbara Star reviews and updates ways to use it.

At present, virtually every charting software package contains Gerald Appel's moving average convergence/divergence (MACD) indicator. The indicator is composed of two lines: the MACD line, which is the difference between two exponential moving averages (usually a 12- and 26-period EMA), and the signal line or trigger, which is an exponentially smoothed moving average, usually a nine-period EMA, of the MACD line often displayed as a dotted line. When the MACD line and the trigger line cross, a potential change in trend is signaled (Figure 1). Thomas Aspray provided a variation on the MACD for trading stocks and commodities in STOCKS & COMMODITIES articles in 1988.

While experimenting with the MACD, Aspray found that its signals often lagged when used with weekly data, causing late entries or exits. He also discovered that an MACD based on a shorter-length EMA was more responsive to price turns than the original 12- and 26-period EMA. Like most traders, however, Aspray wanted more than an indicator that caught trend changes; he wanted one that could anticipate potential changes in MACD turning points.

To achieve that goal, the MACD required two modifications. First, an MACD histogram was required. A histogram is a line style that reflects changes in the indicator as individual vertical lines above and below a zero point. It is often easier to see changes develop when using a histogram instead of the usual solid line style.

The MACD histogram, however, is more than a visual change in line style; it measures the difference (or space) between the MACD line and the trigger line. For his MACD histogram, Aspray began with the difference between a 10- and 20-period exponentially smoothed moving average to produce the MACD line. He then calculated the difference between that MACD line value and a 10-period exponentially smoothed moving average (the trigger line) of the MACD line to obtain the histogram value that is plotted using a histogram line style.

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