Moving Average Convergence Divergence (MACD)

The MACD trading method is a form of a trend-deviation indicator using two MAs, the shorter being subtracted from the longer.

The two MAs are usually calculated on an exponential basis, in which more recent periods are more heavily weighted than in the case of a simple MA. It is normal for the MACD to then be smoothed by a third exponential moving average (EMA), which is plotted separately on the chart.

This average is known as the signal line, the crossovers of which generate buy and sell signals. This indicator obtains its name from the fact that the two EMAs are continually converging and then diverging from each other. The MACD has gained great popularity over the years, but in effect, it is really just another variation on a trend-deviation indicator that employs two EMAs as its method of deviation.

MACDs can be used with many different time periods. It is recommends that buy signals on a daily chart be constructed from a combination of 8, 17, and 9 exponential MAs, but that sell signals are more reliable when triggered on the basis of a 12, 25, and 9 combination. On the other hand, the popular MetaStock program plots the default values as 12 and 17 with the signal line at 9.

Alternatively, the MACD can be plotted as a smoother series using two relatively long-term MAs. This more deliberate series then lends itself better to signal-line crossovers. For example, on hourly charts, a 65/90 combination with a 12-period signal line appears to work quite well. The same principle can be applied to daily, weekly, or monthly charts. Ironically the default time span used for daily charts (26/12 with a 9-day signal line) appears to work better on monthly ones because it manages to retain the primary trend swings yet the signal line whipsaw crossovers are kept to a minimum.