|
|
The MACD
By Jason Mitchell
What Is The MACD ?
The MACD
is called the moving average convergence divergence indicator. While this
sounds complex it really isn’t. Basically it uses two moving averages (The MA part of MACD)
and measures the distance between these averages. (The CD part of MACD).
Convergence and Divergence
are terms that refer to the spreading or coming together of two or more things, in this case moving
averages. Once this distance is calculated it is shown as a line.
This line then has a moving
average placed on it so that we now have two lines. This second moving average is called a
trigger line.
The MACD uses the 9 and 26 day moving average to calculate the indicator, and in
my opinion does not really tell us anything more than these two averages displayed on a chart.
See the chart below to see what I mean by this.
How Is The MACD Calculated ?
As mentioned above the MACD is calculated using the 9 & 26 Day Moving Average. It has two lines, the first being the MACD and the second an average of the MACD.
The calculation for the first line is:
9 Day Moving Average – 26 Day Moving Average = MACD
The Second Line is calculated as a moving average of the MACD
What Does The MACD Tell Us ?
I personally do not use the
MACD as I do not feel it can give me much information I can not see with Moving Averages which I
use a fair but. Further to this the MACD uses set moving averages and as I discussed in the section
on two moving averages, not every stock suits the same averages.
The thing that the MACD answers is, how far apart are the moving averages separated and are they
separating further or coming together. Going a little further it obviously can tell us the same thing
as moving averages which is have prices been rising or falling.
The Above Chart Has the MACD Displayed
above price action. I have pointed out how easy it is to see things in the moving averages without the use of the MACD
but I could also have pointed out that the MACD did define the trend between JUne and Ausgust reasonably well. It is not that I do not
think MACD's don't work - I believe they do, but I also think moving averages tell us all we need to see.
Interpreting the MACD
The MACD is often discussed as a
trend trading method, although as it’s primary signals relate to moving average crossovers I do not feel
it is always good for this.
Basically if the MACD is rising and above zero the moving averages are rising and are spreading apart suggesting tyhat the
price has been rising strongly. Strong rises are often associated with trending activity. If the MACD is falling and is above
zero then it is saying that while the 9 Day Moving Avarege is above the 30 day, they are getting closer, suggesting the price
has not been moving up as quickly as it was. Due to the fact that trends often weaken before they collapse, sometimes
this indicator can help to give early signals of this. Obviously if the MACD is below Zero the opposite is true in that
a rsing MACD indicates a slowdown and a falling MA indicates acceleration of prices.
Due to the nature of the MACD I feel it is slightly better as a momentum indicator.
What Question(s) Does the MACD Answer
* Have the moving averages been getting further apart or closer together?
* Has there been a cross of the moving averages ?
What Are The Well Published Signals
* Cross Of Trigger Line
* Cross Of Zero Line
* Divergence
Cross Of Zero Line
Obviously as discussed above
the cross of the zero line in the MACD is really only telling us that there has been a cross of
the 9 & 26 Day Moving Averages. As discussed in the section on moving averages, this only tells us
that prices have been rising or falling and that this is not in line with previous behaviour. In
saying this I do not see the point of using an indicator to find moving average cross overs, they can
be readily seen on the chart and looking at the averages in relation to price gives us a much better
idea of the relationship of the two.
Cross of the Trigger Line
The cross of the trigger line basically is the cross of the mACD above it’s own moving average. This
is designed to capture change in trends early as when the moving averages begin to come together
again, there is a crossover of the MACD and it’s trigger. Obviously due to this the cross of the
trigger line gives many false signals, as moving averages rarely move in a nice parallel fashion,
They converge and diverge quite frequently in a healthy trend and this indicator is designed to alert
you to these changes
What Other Indicators Work Well With This
* Line Studies
* Volume Based indicators such as the OBV, Chaikins Money Flow or Volume itself.
* ADX group of indicators
* Guppy Multiple Moving Averages
* Relative Strength Index
* Count Back Technique
* Momentum Oscillators
* JICD (personal indicator)
This Article is written by Jason Mitchell
© Copyright Jason Mitchell 2006Testing Results