Moving Average Convergence-Divergence (MACD)

History

Moving Average Convergence-Divergence (MACD) was originally constructed by Gerald Appel an analyst in New York. Originally designed for analysis of stock trends, it is now widely used in many markets.

MACD is constructed by making an average of the difference between two moving averages. The difference of the original two moving averages and the moving average of the difference can be plotted as two lines, one fast and one slow.

Uses

Most modern charting software now includes MACD as standard. Once selected to display in your charting software it normally shows up as two lines plotted on an open scale against the zero line. These two lines will normally be of different colour or one line a solid line and the other a dotted line. Frequently used settings are 12 and 26 period exponential moving averages with 9 period exponential moving average as the signal line.

Although there are three moving averages mentioned you will only see two lines. The simplest method of use is when the two lines cross. If the faster signal line crosses above the slower line then a buy signal is generated and vice versa. It is also used as an overbought and oversold indicator. The higher above the zero both lines are the more overbought it becomes and the lower below the zero line both lines are the more oversold it becomes.

It may also lead to a stronger signal if the signal line crosses down when it is overbought and crosses up when it is oversold.The last common use of MACD is that of divergence.

If the MACD is making new lows and the price of the security is not making new lows that is one form of divergence (bullish divergence). Also, if the MACD has made a high and starts to head down but price continues up that is another type of divergence (bearish divergence) and may lead to an indication of a change in direction.

My Own Use Of MACD

Through my vast trading experience, I have devised a unique strategy using MACD, which used just on it’s own, can create profitable trade.

However, when there is confluence of events, than this makes it one of the most powerful indicators. This strategy is covered fully, in our home study guide – a step-by-step instruction, of how you can profit, from using this simple strategy.

In fact one of my students, makes a living, just from trading this strategy.

USDCAD 60 Minute Chart

Using our unique MACD signal, Go long at 1.2295. Just using this strategy would have produced a profit of over 100 pips.