The MACD is a stock market indicator that plays a crucial part in the technical analysis of the market. The MACD is basically the study of price graphs in order to recognize trends and to predict the developments in the market. Showing the relationship between moving averages, this method is widely used to check for signals highlighting the ideal periods of buying and selling.
Basic Concepts in MACD
The MACD is the difference of moving averages in the courses, and its curve is plotted on the graph of the evolution of the course – by setting a zero line of the MACD. Developed by Gerald Appel, it instantly calculates the difference between a short-term exponential moving average and long-term exponential moving average (generally 26 and 12 periods). The first curve is a simple oscillator of exponential moving averages called fast MACD line and then added on the same chart; a second curve called a ‘signal line’ represents an exponential moving average for period 9 of the first curve.
The succession crossings and therefore convergence-divergence moving averages gave the name of this oscillator: moving average convergence divergence.
Interpretation
Analysis of the MACD can anticipate market developments technically. Thus, it is recommended to buy when the fast MACD curve cuts the slow signal line upwards. It identifies the changes in the balance of power between bullish and bearish. Conversely, the downward crossing of the signal by the slow curve fast MACD is a sell signal. When you notice a dramatic rise in the MACD, it is a signal that there is an overbought of security and it will return to the normal levels soon. Traders also keep a look out on the short and long term average by keeping an eye on the movement below and above the zero line.
This stock market indicator is frequently used by analysts as it provides dynamically price trend signals, and more reactively than other methods used, for example, the crossing of two moving averages (typically 20 to 50 days). Obviously, the MACD cannot be a panacea for every type of trend. It is not really suitable for short-term investments (trading for the day), and must be complemented with other analyses.
It may be necessary to correlate the signals from the MACD with that of powers of indicators such as RSI. Today, the MACD has many variations for refining the divergences and convergences of the two moving averages as is the case of zero MACD lag.
Further Reading
- Technical analysis and the London stock exchange: testing the MACD and RSI rules using the FT30 – www.tandfonline.com [PDF]
- Technical analysis and the Spanish stock exchange: testing the RSI, MACD, momentum and stochastic rules using Spanish market companies – www.tandfonline.com [PDF]
- Application of MACD and RVI indicators as functions of investment strategy optimization on the financial market – hrcak.srce.hr [PDF]
- Stock market efficiency and the MACD. Evidence from countries around the world – www.sciencedirect.com [PDF]
- Revisiting the Performance of MACD and RSI Oscillators – www.mdpi.com [PDF]
- Efficacy of Refined MACD Indicators: Evidence from Indian Stock Markets. – search.ebscohost.com [PDF]
