Moving average convergence and divergence(MACD) is a trend following(lagging) momentum indicator which is dynamic and premeditated to identify trend changes.Developed by Gerald Appel in the 1960s,MACD shows the correlation between a fast and slow exponential moving average(EMA) of closing price. Gerald Appel recommended 12 and 26 days as standard periods.This indicator is calculated by subtracting the 26-day EMA(which is slow moving) from the 12-day EMA(which is fast moving).
The formula is as follows:MACD=EMA(12)of price-EMA(26)of price
A signal line or trigger line is plotted on the MACD chart to give buy and sell signals.This signal line is formed by smoothing MACD with another exponential moving average line.The standard period for signal line is nine days.
Signal=EMA(9)of MACD.The MACD and its signal lines fluctuates above and below a zero line,that is from the positive to the negative territory,similar to the price rate of change(ROC) indicator.
Divergence between the MACD and the price chart also provide signals to investors about the right point for buying or selling a stock.When the stock price makes lower while the MACD plots higher lows in the negative territory,a positive divergence is formed.Likewise,when the stock price continues to rise forming higher peaks,while MACD peaks out and begins to form lower peaks in the positive territory,it is negative divergence and a sell signal.When the MACD line rises significantly from the signal line in the positive territory,the gap widens between two lines.This indicates that the stock is overbought and is likely to revisit normal levels.Similarly,when the MACD line declines significantly from the signal line in the negative territory,as gap widens between the two lines.The stock may then revisit normal levels.
MACD is generally not suggested for ranging market or sideway conditions.Second,this oscillator is slower in giving buy or sell signals when compared to ROC or RSI oscillators.
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