FOREX Money Trader
FOREX Money Trader
Our Site is dedicated to providing as much straight forward information
as we possibly can without all the extras hype. Currency knowledge
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MLD
Our Site is dedicated to providing as much straight forward information
as we possibly can without all the extras hype. Currency knowledge
that's empowering.
MLD
| Foreign Currency Exchange Information: MACD |
| Moving Average Convergence Divergence (MACD) |
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| Copy Right 2008 |
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Moving Average Convergence Divergence (MACD)
MACD is a trend following indicator, and is designed to identify trend changes. It's generally not recommended for
use in ranging market conditions. Three types of trading signals are generated,
• MACD line crossing itself.
• MACD line crossing 10.
• Divergence between price and 10.
The signal line crossing is the usual trading rule. This is to buy when the MACD crosses up through the signal line,
or sell when it crosses down through the signal line. These crossings may occur too frequently, and other tests may
have to be applied.
The histogram shows when a crossing occurs. When the MACD line crosses through zero on the histogram it is said
that the MACD line has crossed the signal line. The histogram can also help visualizing when the two lines are
coming together. Both may still be rising, but coming together, so a falling histogram suggests a crossover may be
approaching.
A crossing of the MACD line up through zero is interpreted as bullish, or down through zero as bearish. These
crossings are of course simply the original EMA(12) line crossing up or down through the slower EMA(26) line.
Positive divergence between MACD and price arises when price makes a new selloff low, but the MACD doesn't
make a new low (i.e. it remains above where it fell to on that previous price low). This is interpreted as bullish,
suggesting the downtrend may be nearly over. Negative divergence is the same thing when rising (i.e. price makes a
new rally high, but MACD doesn't rise as high as before), this is interpreted as bearish.
Divergence may be similarly interpreted on the price versus the histogram, where the new price levels are not
confirmed by new histogram levels. Longer and sharper divergences (distinct peaks or troughs) are regarded as
more significant than small shallow patterns in this case.
It is recommended to look at a MACD on a weekly scale before looking at a daily scale to avoid making short term
trades against the direction of the intermediate trend.[
Sometimes it is prudent to apply a price filter to the Bullish Moving Average Crossover to ensure that it will hold. An
example of a price filter would be to buy if MACD breaks above the 9-day EMA and remains above for three days.
The buy signal would then commence at the end of the third day.
Signal/Trigger Line
Moving averages aren't limited to just stock prices; MAs can be created for any form of data that changes
frequently. It is even possible to take a moving average of a technical indicator such as the MACD. For example, a
nine-period EMA of the MACD values is added to the chart in Figure 1 in an attempt to form transaction signals. As
you can see, buy signals are generated when the value of the indicator crosses above the signal line (dotted line),
while short signals are generated from a cross below the signal line. It is important to note that regardless of the
indicator being used, a move beyond a signal line is interpreted in the same manner; the only thing that varies is the
number of time periods used to create it.
Figure 1
Signal Processing
The MACD is a filtered measure of the velocity. The velocity has been passed through two first order linear low pass
filters. The "signal line" is that resulting velocity, filtered again. The difference between those two, the histogram, is a
measure of the acceleration, with all three filters applied. The "MACD crossing the signal line" suggests that the
direction of the acceleration is changing. "MACD line crossing zero" suggests that the average velocity is changing
direction.
MACD is a trend following indicator, and is designed to identify trend changes. It's generally not recommended for
use in ranging market conditions. Three types of trading signals are generated,
• MACD line crossing itself.
• MACD line crossing 10.
• Divergence between price and 10.
The signal line crossing is the usual trading rule. This is to buy when the MACD crosses up through the signal line,
or sell when it crosses down through the signal line. These crossings may occur too frequently, and other tests may
have to be applied.
The histogram shows when a crossing occurs. When the MACD line crosses through zero on the histogram it is said
that the MACD line has crossed the signal line. The histogram can also help visualizing when the two lines are
coming together. Both may still be rising, but coming together, so a falling histogram suggests a crossover may be
approaching.
A crossing of the MACD line up through zero is interpreted as bullish, or down through zero as bearish. These
crossings are of course simply the original EMA(12) line crossing up or down through the slower EMA(26) line.
Positive divergence between MACD and price arises when price makes a new selloff low, but the MACD doesn't
make a new low (i.e. it remains above where it fell to on that previous price low). This is interpreted as bullish,
suggesting the downtrend may be nearly over. Negative divergence is the same thing when rising (i.e. price makes a
new rally high, but MACD doesn't rise as high as before), this is interpreted as bearish.
Divergence may be similarly interpreted on the price versus the histogram, where the new price levels are not
confirmed by new histogram levels. Longer and sharper divergences (distinct peaks or troughs) are regarded as
more significant than small shallow patterns in this case.
It is recommended to look at a MACD on a weekly scale before looking at a daily scale to avoid making short term
trades against the direction of the intermediate trend.[
Sometimes it is prudent to apply a price filter to the Bullish Moving Average Crossover to ensure that it will hold. An
example of a price filter would be to buy if MACD breaks above the 9-day EMA and remains above for three days.
The buy signal would then commence at the end of the third day.
Signal/Trigger Line
Moving averages aren't limited to just stock prices; MAs can be created for any form of data that changes
frequently. It is even possible to take a moving average of a technical indicator such as the MACD. For example, a
nine-period EMA of the MACD values is added to the chart in Figure 1 in an attempt to form transaction signals. As
you can see, buy signals are generated when the value of the indicator crosses above the signal line (dotted line),
while short signals are generated from a cross below the signal line. It is important to note that regardless of the
indicator being used, a move beyond a signal line is interpreted in the same manner; the only thing that varies is the
number of time periods used to create it.
Figure 1
Signal Processing
The MACD is a filtered measure of the velocity. The velocity has been passed through two first order linear low pass
filters. The "signal line" is that resulting velocity, filtered again. The difference between those two, the histogram, is a
measure of the acceleration, with all three filters applied. The "MACD crossing the signal line" suggests that the
direction of the acceleration is changing. "MACD line crossing zero" suggests that the average velocity is changing
direction.
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