Reversing MACD: The Sequel by Johnny Dough
Indicator Crossing Ahead!
Here’s a look at a function that calculates what the price of
the next bar would need to be for the MACD line and signal
line to cross.
It's not uncommon to stare at an indicator on a chart and
wonder what it will take for a price signal to be generated
by that indicator. In my January 2012 Stocks & Commodities
article “Reversing MACD,” I discussed a couple of
functions that were based on the relationship of the moving
average convergence/divergence (MACD) line. You could
plot those functions on a price chart with price projection
one bar ahead. One function showed the price required for
a change in the direction of MACD. The other showed the
price required for the MACD line to cross a certain value
level. Specifically, when you are looking at MACD crossing
the zero level, you can anticipate the price required for the
crossing of the two exponential moving averages used to compute the MACD line.
In this article, I will look at one relationship based on the
MACD line and its signal line to price. I will also show three
similar price functions for the MACD formula using simple
Macd and signal
The MACD was created by Gerald Appel. It’s calculated using
two exponential moving averages (EMAs) of different lengths
and is the value of the shorter (fast)–period EMA less than
the value of the longer (slow)–period EMA.
In the fall of 1986, Thomas Aspray developed an indicator
he called the MACD-histogram (MACD-His). It’s based on
the spread of the MACD and signal lines and is commonly
seen plotted as a histogram with the MACD or as an indicator
by itself. It is also known as MACDH. Visually, it shows
clearly the size of the spread and the crossing of the MACD
and signal lines. Aspray used divergences to produce reliable
signals before those of the MACD.