What is MACD?

7:07 AM

What is MACD?

What is Moving Average Convergence Divergence (MACD)?.
Moving Average Convergence/Divergence (MACD) is used to recognize moving average that can identify bullish and bearish trends.

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In the Moving Average Convergence Divergence (MACD) chart, there are 3 parameters that you have to set. Each of them representing particular function. The first parameter represents the faster moving average, the second parameter represents a slower moving average, and the third parameter represents the number that will be used to calculate the difference between the fastest and the slower moving average.

Example, MACD : 12, 26, 9 (default numbers) means:

12 represents 12 bars of the fastest moving average.
26 represents 26 bars of the fastest moving average.
9 represents 9 bars of differences between the first 2 moving average. The difference is shown with a blue vertical line chart (histogram).

The first parameter must be smaller in value than the second one. Two curves appear in MACD indicator do not represent the first and second parameters, but they are the difference between 2moving average.

In the example above, the faster curve represents the difference between 12 and 26 moving average, while the slower curve is the average plot of the previous moving average. The third parameter is the actual moving average. So, MACD : 12, 26, 9 in simple is a moving average in 9 bars period.

In other words, MACD indicator 12, 26, 9 means 9 bars moving average from the fastest curve plotted on the slower curve. Histogram chart shows the difference between a fast curve with a slower one. If you carefully notice, two curves which are getting apart from each other will make the histogram chart getting bigger, and it is called MACD ’Moving Average Convergence Divergence’.

MACD Crossover
Because of the existence of 2 different speed of moving average, the faster moving average will respond move quickly to the price movement than the slower one. When a trend is started to be formed, the faster moving average will react more quickly, and finally will touch/across the slower moving verage and it will be getting away (diverge).

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From the carht above, it can be seen that the foster curve will across and will be below the slower one. It indicates the beginning of a downtrend. Please notice when 2 curves touch each other from the very first time, the histogram will disappear. It happens because the difference between 2 curves when they are touching each other is 0 (zero). When a downtrend is started to be formed, the faster curve will diverge from the slower one and a histogram chart will get bigger.

A disadvantage of MACD is this indicator is not included into lagging indicator. MACD indicator is a moving average which is formed from the historical price data.

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