Understanding MACD (Moving Average Convergence Divergence) [Gerald Appel, Edward Dobson] on *FREE* shipping on qualifying offers. Unlike most technical analysis books, Gerald Appel’s Technical Analysis offers step-by-step instructions virtually any investor can use to achieve breakthrough. Understanding Macd has 11 ratings and 1 review: Understanding Macd. by. Gerald Appel Understanding Macd (Moving Average Convergence Divergence ).
|Published (Last):||14 November 2005|
|PDF File Size:||18.92 Mb|
|ePub File Size:||10.40 Mb|
|Price:||Free* [*Free Regsitration Required]|
The MACD turns two trend-following indicators, moving averagesinto a momentum oscillator by subtracting the longer moving average from the shorter moving average.
Understanding Macd (Moving Average Convergence Divergence)
As a result, the MACD offers the best of both worlds: The MACD fluctuates above and below the zero line as the moving averages converge, cross and diverge. Traders can look for signal line crossovers, centerline crossovers and divergences to generate signals. Because the MACD is unbounded, it is not particularly useful for identifying overbought and oversold levels.
Click the chart to see a live example. Closing prices are used for these moving averages. The values of 12, 26 and 9 are the typical setting used with the MACD, however other values can be substituted depending on your trading style and goals.
As appel name implies, the MACD is all about the convergence and divergence of the two moving averages. Convergence occurs when the moving averages move towards each other. Divergence occurs when the moving averages move away from each other.
MACD – Wikipedia
The shorter moving average day is faster and responsible for most MACD movements. The longer moving average day is slower and less reactive to price changes in the underlying security. The direction, of course, depends on the direction of the moving average cross.
This means upside momentum is increasing. This means downside momentum is increasing. Signal line crossovers are the most common MACD signals. A bullish crossover occurs when the MACD turns up and crosses above the signal line. A bearish crossover occurs when the MACD turns down and crosses below the signal line. Crossovers can last a few days or a few weeks, it all depends on the strength of the move. Due diligence mwcd required before relying on these common signals.
Signal line crossovers at positive or negative extremes should be viewed with caution.
Even though the MACD does not have upper and lower limits, chartists can estimate historical extremes with a simple visual assessment. It takes a strong move in the underlying security to push momentum to an extreme.
Full text of “Gerald Appel Technical Analysis”
Even though the move may continue, momentum is likely to slow and this will usually produce a signal line crossover macdd the extremities. Volatility in the underlying security can also increase the number of crossovers.
There were eight signal line crossovers in six months: There were some good signals and some bad signals. Even though upward momentum slowed after the surge, upward momentum was still stronger than downside momentum in April-May. The third bearish signal line crossover in May resulted in a good signal. Centerline crossovers are the next most common MACD signals. A bearish centerline crossover occurs when the MACD moves below the zero line to turn negative.
Centerline crossovers can last a few days or a few months. It all depends on the strength of the trend. The MACD will remain positive as long as there is a sustained uptrend. The MACD will remain negative when there is a sustained appell. The resulting signals worked well because strong trends emerged with these centerline crossovers. In contrast to Pulte Homes, these signals would have resulted in numerous whipsaws because strong trends did not materialize after the crossovers.
The next chart shows 3M MMM with a bullish centerline crossover in late March and a bearish centerline crossover in early February This signal lasted 10 months.
This was one strong trend. Divergences form when the MACD diverges from the price action of the underlying security. A bullish divergence forms when a security records a lower low and the MACD forms a higher low. The lower low in the security affirms the current downtrend, but the higher low in the MACD shows less downside momentum.
Despite less downside momentum, downside momentum is still outpacing upside momentum as long as the MACD remains in negative territory. Slowing downside momentum can sometimes foreshadow a trend reversal or a sizable rally. First, notice that we are using closing prices to identify the divergence. The MACD’s moving averages are based on closing prices herald we should consider closing prices in the security as well. Google confirmed a reversal with resistance breakout.
A bearish divergence forms when a security records a higher high and the MACD Line forms a lower high. The higher high in the security is normal for an uptrend, but the lower high in the MACD shows less upside momentum. Even though upside momentum may be less, upside momentum is still outpacing downside momentum as long as the MACD is positive.
Appeel upward momentum can sometimes foreshadow a trend reversal or sizable decline. The stock forged a higher high above 28, but the MACD Line fell short of its prior high and formed a lower high.
The subsequent signal line crossover and support break in the MACD were bearish. On the price chart, notice how broken support turned into resistance on the throwback bounce in November red dotted line. This throwback provided a second geeald to sell or sell short. Divergences should be taken with caution. Bearish divergences are commonplace in a strong uptrend, while bullish divergences occur often in a strong downtrend. Yes, you read that right. Uptrends often start with a strong advance that produces a surge in upside momentum MACD.
Even though the uptrend continues, it continues at a slower pace that causes the MACD to decline from its highs. Upside momentum may not be as strong, but upside momentum is still outpacing downside momentum as long as the MACD Line is above zero.
MACD (Moving Average Convergence/Divergence Oscillator)
The opposite occurs at the beginning of a strong downtrend. Despite gsrald upside momentum, the ETF continued higher because the uptrend was strong. Notice how SPY continued its series of higher highs and higher lows. Remember, upside momentum is stronger than downside momentum mavd long as its MACD is positive. Its MACD momentum may have been less positive strong as the advance extended, but it was still largely positive.
The MACD indicator is special because it brings together momentum and trend in one indicator.
This unique blend of trend and momentum can be applied to daily, weekly or monthly charts. Chartists looking for more sensitivity may try a shorter short-term moving average and a longer long-term moving average. Chartists looking for less sensitivity may consider appell the moving averages. The MACD is not particularly good for identifying overbought and oversold levels. Even though it is possible to identify levels that are historically overbought or oversold, the MACD does not have any upper or lower limits to bind its movement.
During sharp moves, the MACD can continue to over-extend beyond its historical extremes. Finally, remember that the MACD Line is calculated using the actual difference between two moving averages. This means MACD values are dependent on the price of the underlying security. It is not possible to compare MACD values for a group of securities with madc prices. The MACD can be set as an indicator above, below or behind a security’s price plot.
Once the indicator is chosen from the drop-down menu, the default parameter setting appears: These parameters can be adjusted to increase sensitivity or decrease sensitivity. Setting the signal line to 1 or leaving it blank, i.
Click here for a live chart of the MACD indicator.
This scan reveals stocks that are trading above their day moving average and have a bullish signal line crossover in MACD. Also notice gerad MACD is required to be negative to insure this upturn occurs after a pullback. This scan is just meant as a starter for further refinement. This scan reveals stocks that are trading below their day moving average and have a bearish signal line crossover in MACD. Also notice that MACD is required to be positive to insure this downturn occurs after a bounce.