MACD

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Description

The MACD indicator is constructed from weighted Moving Averages, also known as Optimized Averages. Gerald Appel's MACD is the difference between a fast exponential moving average (FastMA) and a slow exponential moving average (SlowMA). During rising markets, the fast moving average will rise more quickly than the slow moving average, resulting in a rising differential line (MACD indicator) or a larger value. During falling markets the FastMA line will fall more quickly than the SlowMA line. The specified length of FastMA must be shorter than the specified length of SlowMA; if not, the oscillator will invert (that is, bullish signals will become bearish signals and bearish signals will become bullish signals).

MACD is generally better at signalling the beginning of bullish moves than bearish moves, and should be applied accordingly. In addition to the conventional usage, careful attention should be paid to changes in this indicator. A downturn in the indicator while a bullish signal is in force is often an early indication that the current up move is losing strength and long positions should be closed. Similarly, an upturn in the MACD indicator while a bearish signal is in force may indicate that the market is finding support and is ready to rally.

Experimentation with historical data will give optimal values for the inputs and necessary practice in interpreting the signals.