Trading The MACD
You can trade Gerald Appel’s moving average convergence/
divergence profitably in relatively flat markets. Here’s how.
The moving average convergence/
divergence (MACD) is a
momentum oscillator developed
by Gerald Appel in the
early 1970s. For this oscillator,
momentum implies that
fluctuations in prices are reflected
in the MACD; if there is
a sudden increase in price, the
MACD will move upward. It
fluctuates above and below a
zero line — which is why it is known as an oscillator. The zero
line is the horizontal equilibrium line and if the indicator is
above the zero line, it is a bullish signal and if below the zero
line, a bearish signal.
The MACD does what its name suggests: it measures the
divergence or convergence of a shorter moving average with
a longer moving average. It is represented in two ways, one
as a line form and the other as a histogram. Figure
1 illustrates the line and histogram versions of
the MACD for the same security.