Category Archives: Macd

MACD Indicator

The MACD indicator is basically a refinement of the two moving averages system and measures the distance between the two moving average lines. MACD is an acronym for Moving Average Convergence Divergence.

MACD was developed by Gerald Appel and is discussed in his book, The Moving Average Convergence Divergence Trading Method.

MACD Trading Signals

The MACD indicator is primarily used to trade trends and should not be used in a ranging market. Signals are taken when MACD crosses its signal line, calculated as a 9 day exponential moving average of MACD.
Trending Market

First check whether price is trending. If the MACD indicator is flat or stays close to the zero line, the market is ranging and signals are unreliable.

  • Go long when MACD crosses its signal line from below.
  • Go short when MACD crosses its signal line from above.

Signals are far stronger if there is either:

  • a divergence on the MACD indicator; or
  • a large swing above or below the zero line.

Unless there is a divergence, do not go long if the signal is above the zero line, nor go short if the signal is below zero. Place stop-losses below the last minor Low when long, or the last minor High when short.

Example 1

Microsoft Corporation chart with: MACD, and MACD signal line.

msft macd signals

  1. Go short [S] – MACD crosses to below the signal line after a large swing.
  2. Go long [L] when MACD crosses to above the signal line.
  3. Strong short signal [S] – the MACD crosses after a large swing and bearish divergence (shown by the trendline).
  4. Go long [L]. Flat MACD signals that the market is ranging – we are more likely to be whipsawed in/out of our position.
  5. Exit long trade [X] but do not go short – MACD is significantly below the zero line.
  6. Re-enter your long trade [L].

MACD Setup

The default settings for the MACD indicator are:

  • Slow moving average – 26 days
  • Fast moving average – 12 days
  • Signal line – 9 day moving average of the difference between fast and slow.
  • All moving averages are exponential.

See Indicator Panel for directions on how to set up an indicator. See Edit Indicator Settings to change the settings.

Captions and trendlines: Use MACD Histogram if you want to draw trendlines or place captions on the histogram. Otherwise, they are left “hanging in the air” if you zoom or change time periods.

MACD Formula

The MACD indicator is calculated as the difference between the fast and slow moving averages:

MACD = 12 Day exponential moving average – 26 Day exponential moving average

The signal line is calculated as a 9 day exponential moving average of MACD.

Example 2

Johnson & Johnson with a 12 day , and a 26 day exponential moving average (EMA) plotted on the price chart. MACD reflects the difference between the fast and slow EMA. The signal line is a 9 day EMA of the MACD indicator.

jnj macd
Observe that:

  • MACD is furthest from the zero line when the gap between the two EMAs is widest.
  • MACD is at zero when the two EMAs cross (the trading signal when using two moving averages).
  • MACD fluctuates between 1.0 and -1.0 when the market is ranging.

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MACD Histogram

The signals from the MACD indicator tend to lag price movements. The MACD Histogram attempts to address this problem by plotting the distance between MACD and its signal line. Because of this, the histogram signals trend changes well in advance of the normal MACD signal, but is less reliable and should be confirmed by other indicators.

Only trade with Histogram signals when the market is trending.

The MACD Histogram can also be used to track longer cycles, using weekly or monthly data.

Trading Signals

Use Stop Losses with all trades.

 

Ranging Markets

Signals are stronger if

  • There is a bullish divergence on the Histogram; or
  • The signal occurs far from the zero line.

Disregard signals close to the zero line unless confirmed by a divergence.

  • Go long when the MACD Histogram turns up below zero.

Close the position when there is a signal to go short.

  • Go short when MACD Histogram turns down above zero.

Close the position when there is a signal to go long.

 

Trending Markets

Only trade in the direction of the trend. Signals close to the zero line are accepted provided the trend is intact.

  • Go long when the MACD Histogram turns up below zero.
  • Go short when MACD Histogram turns down above zero.

Use a trend indicator, such as a moving average, to exit from trends.

Example

Intel Corporation is shown with MACD histogram and 21-day exponential moving average. Trendlines show divergences.

intc macd histogram 99

Mouse over chart captions to display trading signals.

  1. Price is ranging – indicated by the flat MA. Go long [L] when the histogram turns up (far from the zero line). Place a stop below the recent Low.
  2. Go short [S] as the histogram turns down (far from the zero line). Place a stop above the recent High.
  3. Go long [L] – the histogram turns up and is reinforced by a bullish divergence. Place a stop below the recent Low.
  4. Go short [S] as the histogram turns down – reinforced by a bearish divergence. Place a stop above the recent High.
  5. Ignore the signal as it is too close to the zero line.
  6. Go long [L] as the histogram turns up when well below zero. Place a stop below the recent Low.
  7. A further signal to go short [S]. Place a stop above the recent High.
  8. Go long [L] – the histogram has turned up and is reinforced by a bullish divergence. Price has broken clear of the trading range and the MA is rising – exit [X] when price closes below the MA.

Setup
The default settings are:

  • Slow moving average – 26 days
  • Fast moving average – 12 days
  • Signal line – 9 day moving average of the difference between fast and slow.
  • All moving averages are exponential.

To alter the default settings – see Edit Indicator Settings. See Indicator Panel for directions on how to set up an indicator.

Captions and trendlines: Do not use MACD if you want to draw trendlines or place captions on the histogram. These are left “hanging in the air” if you zoom or change time periods.

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