Working Money: A Taste Of The Big MACD by Amy Wu
Indicators like the moving average convergence/divergence help you confirm signals and decrease
risk when buying and selling securities. Invented by
Gerald Appel in the 1970s, the MACD has become a
staple in the world of technical analysis. Here’s how
you can make use of it.
One of the most popular indicators used in technical
analysis is the MACD (moving average convergence/divergence). In its most common form, the MACD
is calculated by taking the difference between a 26-day and
a 12-day exponential moving average. This difference, sometimes
referred to as the price oscillator, will vary depending
on the momentum of the security. A second line, called the
signal or trigger line, is created by taking a nine-day exponential
moving average of the price oscillator.
The MACD is a trend-following indicator, moving in the
direction of the prevailing price movement. This should be
apparent, since it is based on moving averages that are calculated
by using a security’s price history. Since the price
oscillator is the 12-day minus the 26-day exponential moving
average, a difference of zero results in a horizontal line.
Such a line indicates that the 26-day and the 12-day moving
averages are changing at the same rate. In general, the quantity
of the difference and whether it is positive or negative
show how much faster or slower the exponential averages
are moving relative to each other.