Moving Average Convergence Divergence (MACD)

Created by Gerald Appel in the late 1970s, it is one of the simplest and most effective momentum indicators available.

This indicator combines the use of two Exponential Moving Averages (EMA) with different time periods (usually the 12 and 26 EMA), on the price chart and measures their convergence or divergence which is essentially the distance between them. Since the EMA with the shorter time-period will follow the prices more closely while the longer period EMA lags behind, there will be a resulting difference. This difference is plotted on a separate chart with a line that oscillates above and below the zero line whenever the two moving averages intersect. This is the MACD line.

In order to better estimate entry or exit points from the market a Simple Moving Average (SMA) of the MACD line is plotted on the chart and thus crossings of the MACD line with the EMA of the MACD line give buy/sell signals. The time frame usually applied is the 9 SMA.

For visual purposes it is common to plot the zero line as crossings of this line give buy/sell signals.

For the full article, see attached Word file.