MACD , short for the average of convergence/divergence moves , is the trading indicator used in technical analysis of stock prices, created by Gerald Appel in the late 1970s. This should reveal a change in the strength, direction, momentum, and duration of a stock's price trend.
The MACD indicator (or "oscillator") is a collection of three time series calculated from the historical price data, most often the closing price. These three series are: the right MACD series, the "signal" or "average" series, and the "divergence" series which is the difference between the two. The MACD series is the difference between the "fast" (short periods) of the average moving average (EMA), and the "slow" (longer period) EMA of the price series. The average series is the EMA of the MACD series itself.
The MACD indicator thus depends on three time parameters, ie the time constants of the three EMAs. The notation "MACD ( a , b , c )" usually shows an indicator where the MACD series is the EMA difference with characteristic time a and b , and the average series is the EMA of the MACD series with characteristic time c . These parameters are usually measured in a few days. The most frequently used values ​​are 12, 26, and 9 days, ie MACD (12,26,9). In line with most of the technical indicators, MACD also finds the setting of the period from the past when technical analysis is used mainly on a daily chart. The reason is the lack of a modern trading platform that shows price changes at any time. Since the working week is 6 days, the period arrangements (12, 26, 9) represent 2 weeks, 1 month and one and a half weeks. Now when trading week has only 5 days, the possibility of changing the period setting can not be denied. However, it is always preferable to stick to the period settings used by the majority of traders as buying and selling decisions based on standard settings further push the price in that direction.
MACD and the average series are usually shown as continuous lines in the plot whose horizontal axis is the time, whereas the difference is shown as a bar graph (often called a histogram).
The fast EMA responds faster than the slow EMA to recent stock price changes. By comparing EMA from different periods, the MACD series can show changes in the trend of a stock. It is claimed that the divergence series can reveal a subtle shift in stock trends.
Because MACD is based on moving averages, it is an indicator that is left behind. As a price trend metric, MACD is less useful for stocks that are not trending (traded in the range) or trading with uncertain price action.
Video MACD
History
The right MACD series was created by Gerald Appel in the 1970s. Thomas Aspray added a divergence bar chart to the MACD in 1986, as a means to anticipate the MACD crossover, an important indicator of movement in underlying security.
Maps MACD
Terminology
Over the years, MACD elements have been known by many terms and often overloaded. A common definition of a very overloaded term is:
Divergences: 1. Like D in MACD, "divergence" refers to two moving underlying moving averages, while "convergence" refers to two underlying moving averages coming toward each other. 2. Gerald Appel refers to "divergence" as the situation in which the MACD line does not match the price movement, ie. low price is not accompanied by low MACD. and 3. Thomas Asprey dubbed the difference between the MACD and the "divergence" series signal line. In practice, the definition of number 2 above is often preferred.
Histogram: 1. Gerald Appel refers to the plot bar graph of the base MACD time series as "histogram". In the Appel Histogram, the height of the stem corresponds to the MACD value for a given point in time. 2. The difference between MACD and its Signal line is often plotted as a bar graph and is called a "histogram". In practice, the definition of number 2 above is often preferred.
Math interpretation
In signal processing terms, the MACD series is a filtered size of the derivative of the input (price) series with respect to time. (Derivatives are called "speed" in technical stock analysis). MACD estimates derivatives as if they are calculated and then filtered by two simultaneous low-pass filters, multiplied by the same "gain" as differences in their time constants. It can also be seen to estimate the derivative as if calculated and then filtered by a single low passon exponential filter (EMA) with a time constant equal to the number of time constants of two filters, multiplied by the same gain. Thus, for standard MACD filter time constants for 12 and 26 days, the estimated MACD derivative is filtered approximately equivalent to a low-pass EMA filter for 38 days. Estimated time derivative (per day) is the value of MACD divided by 14.
Average averages are also derived estimates, with additional low-pass filters together for further smoothing (and additional lag). The difference between the MACD series and the average series (the series of divergences) represents the second derivative size of the time-related price ("acceleration" in the technical stock analysis). This estimate has an additional lag of the signal filter and an additional strengthening factor equal to the signal filter constant.
Classification
MACD can be classified as an absolute price oscillator (APO), since it corresponds to the actual moving average price of the percentage change. A percentage price oscillator (PPO), on the other hand, calculates the difference between two moving averages of the price divided by a longer moving average value.
While APO will show higher rates for higher-priced securities and lower rates for lower-priced securities, PPO calculates changes relative to prices. Furthermore, PPO is preferred when comparing oscillator values ​​between different securities, especially those with very different prices; or comparing the oscillator values ​​for the same security at different times significantly, especially security whose value is highly variable.
Another member of the price oscillator family is the detrended price oscillator (DPO), which ignores long-term trends while emphasizing short-term patterns.
Trade Interpretation
The exponential moving average highlights recent changes in the price of a stock. By comparing the EMA with different lengths, the MACD series gauges are changing in stock trends. The difference between the MACD series and its average is claimed to reveal a subtle shift in the strength and direction of a stock's trend. It may be necessary to correlate the signal with MACD to an indicator such as RSI power.
Some traders attribute significant significance to the MACD line across the signal line, or the MACD line across the zero axis. Significance is also associated with disagreements between MACD lines or difference lines and stock prices (in particular, higher highs or lower lows in price series not matched in indicator series).
Crossover line-signals
A "cross-signal line" occurs when the MACD and the mean line cross over; that is, when divergence (bar graph) changes the sign. The standard interpretation of such an event is a recommendation to buy if the MACD line crosses through a bullish crossover, or to sell if it traverses through a bearish crossover. These events are taken as an indication that the trend in stock will accelerate toward crossover.
Zero crossover
A "zero crossover" event occurs when the MACD series changes its mark, that is, the MACD line crosses the horizontal zero axis. This happens when there is no difference between the fast and slow EMA of the price series. The change from positive to negative MACD is interpreted as "bearish", and from negative to positive as "bullish". Zero crossover provides evidence of trend direction change but less confirmation of momentum than crossover signal line.
Divergence
"Positive divergence" or "bullish divergence" occurs when the price makes a new low but MACD does not confirm with new lows. "Negative divergence" or "bearish divergence" occurs when the price creates a new high price but MACD does not confirm with its own new high. Divergences in respect of prices may occur on the MACD line and/or the MACD Histogram.
Time
MACD is only useful as the context in which it is applied. An analyst may apply MACD to a weekly scale before looking at the daily scale, to avoid making short-term trades against the direction of intermediate trends. Analysts will also vary the MACD parameters to track trends of varying durations. A popular short-run set-up, for example, is (5,35,5).
Incorrect signals
As with any forecasting algorithm, MACD can generate false signals. A false positive, for example, will be a bullish crossover followed by a sudden drop in a stock. The wrong negative will be the situation where there is a bearish crossover, but the stock accelerated suddenly upward.
Wise strategies may apply filters to signal crossover lines to ensure that they have survived. An example of a price filter is to buy if the MACD line breaks above the signal line and then stays on it for three days. As with filtering strategies, this reduces the likelihood of false signals but increases the frequency of lost profits.
Analysts use various approaches to filter out false signals and confirm the correct ones.
A MACD crossover of the signal line indicates that the acceleration direction is changing. The MACD line across the zero indicates that the average velocity changes direction.
Further reading
See also
- Relative Strength Index
- Ultimate Oscillator
- Williams% R
References
External links
- Divergences Trade Indicators at FXLeaders.com
Source of the article : Wikipedia
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