Stocks & Commodities V. 26:7 (24-33): Leader Of The MACD by Giorgos Siligardos

Leader Of The MACD by Giorgos Siligardos

If the moving average convergence/divergence (MACD) is essential to your analysis, then an indicator that often leads it at critical situations will be of great interest to you.

The moving average convergence/divergence (MACD) is one of the best-known trend momentum indicators. Introduced by Gerald Appel in the 1960s, it later became widely used with the popularization of personal computers as both an analysis tool and an essential component of trading systems. Its popularity, however, may be why it has lost much of its prestige in the current era. Although MACD has been criticized as a trend indicator that produces many whipsaws and is inappropriate for simple trading decisions, it is nevertheless heavily used as a trendanalysis tool and is offered in most technical analysis reports and newsletters. This article is for those who actively use the MACD and would like to know how to get warning signals of possible changes in its direction.

A SHORT OVERVIEW OF MACD

The MACD is computed by subtracting a 26-period exponential moving average (EMA) of the closing price from a 12- period EMA of the closing price:

MACD = EMA(12)-EMA(26)

The main purpose of MACD is to provide a smooth trend indicator, and many analysts use its sign to characterize the long-term trend as bullish or bearish: When MACD is positive, the long-term trend is considered bullish, and when MACD is negative, the long-term trend is considered bearish. For the characterization of the short-term trend, a nine-period EMA of MACD is usually used as a signal line: When MACD is greater than its signal line, the short-term trend is considered bullish, and when MACD is lower than its signal line, the short-term trend is considered bearish.