Celticheart Investor
A beginner's guide to trading and investing
The next logical step after looking at moving averages is the Technical analysis tool Moving Average Convergence - Divergence, more commonly called the MACD.
The MACD was created by Gerald Appel in the late 1970's and is used to identify changes in the strength, direction and duration of a trend in a share price.
Developed by Gerald Appel in the late seventies, the Moving Average Convergence-Divergence (MACD) indicator is one of the simplest and most effective momentum indicators available. The MACD turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average (26 day) from the shorter moving average (12 day).
The MACD Line is calculated by subtracting the the 26 day EMA (long term) from the 12 day EMA (short term). In addition to which the 9 day EMA is used as a signal line (also called the trigger line) to identify trend changes. The MACD Histogram (bar chart) shows
the difference between MACD and its 9 day EMA, the Signal line. The
histogram is positive when the MACD Line is above thes Signal line and
negative when the MACD Line is below the Signal line.
The MACD fluctuates above and below the zero line as the moving averages converge, cross and diverge. Consequently, traders can identify signal line crossovers, centerline crossovers and divergences to generate trends.
Developed by Gerald Appel in the late seventies, the Moving Average Convergence-Divergence (MACD) indicator is one of the simplest and most effective momentum indicators available. The MACD turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average (26 day) from the shorter moving average (12 day).
The MACD Line is calculated by subtracting the the 26 day EMA (long term) from the 12 day EMA (short term). In addition to which the 9 day EMA is used as a signal line (also called the trigger line) to identify trend changes. The MACD Histogram (bar chart) shows
the difference between MACD and its 9 day EMA, the Signal line. The
histogram is positive when the MACD Line is above thes Signal line and
negative when the MACD Line is below the Signal line. The MACD fluctuates above and below the zero line as the moving averages converge, cross and diverge. Consequently, traders can identify signal line crossovers, centerline crossovers and divergences to generate trends.
The term MACD is confusing at times because it is used to refer to the indicator as a whole and also the MACD line itself. Just like the EMA the MACD is based on historical data so is always going to be lagging behind the current sp. Although the MACD does not lag behind as much as the EMA as the convergence or divergence can be anticipated in advance, using the zero line as a point of reference.
Although the most common periods used for calculating the MACD are the
12 day, 26 day and 9 day EMA, other periods can be used depending on the trader's strategy and goals.
12 day, 26 day and 9 day EMA, other periods can be used depending on the trader's strategy and goals.
For a more in-depth look at the MACD check out the links below:
http://www.investinganswers.com/financial-dictionary/technical-analysis/moving-average-convergence-divergence-macd-851
Next time: Fibonacci Numbers
A cautionary note, trading and investing in shares carries a level of risk, these blogs are only meant as a basic guideline to investing and trading, always do your own research and base your decisions on what you can afford to lose. This blog is not intended to provide financial advice as I am not qualified to do so, it is simply designed to provide information about how the markets work that might be of some help to private investors like myself.
Next time: Fibonacci Numbers
A cautionary note, trading and investing in shares carries a level of risk, these blogs are only meant as a basic guideline to investing and trading, always do your own research and base your decisions on what you can afford to lose. This blog is not intended to provide financial advice as I am not qualified to do so, it is simply designed to provide information about how the markets work that might be of some help to private investors like myself.
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