Pathshala: Moving Average Convergence Divergence

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<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">(MACD) Moving Average Convergence Divergence </span></h1>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKZoTNSB7fOCpXuzytxEHm-c9-GExpdS47DyV07hBr-qPq2akBa4jGq_l5QUW0DposSDY7kbjZBDBJBJE_hH-9z4v1kgs3d6q5hSvkM3EANndhihoMCwernMUw0YZY00FAYJuf4OExCb8/s1600/MovingAverageConvergenceDivergence.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="150" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKZoTNSB7fOCpXuzytxEHm-c9-GExpdS47DyV07hBr-qPq2akBa4jGq_l5QUW0DposSDY7kbjZBDBJBJE_hH-9z4v1kgs3d6q5hSvkM3EANndhihoMCwernMUw0YZY00FAYJuf4OExCb8/s200/MovingAverageConvergenceDivergence.png" width="200" /></a><span style="font-weight: normal;"><span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;">The MACD indicator is one of the most popular technical analysis tools. </span></span></span><span style="font-weight: normal;"><span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;">MACD is an acronym for <b>M</b>oving <b>A</b>verage <b>C</b>onvergence <b>D</b>ivergence.
 This tool is used to identify moving averages that are indicating a new
 trend, whether it's bullish or bearish.  After all, our top priority in
 trading is being able to find a trend, because that is where the most 
money is made.</span></span></span></h1>
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<span style="font-weight: normal;"><span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;">There 
are three main components of the MACD shown in the picture below:</span></span></span></h1>
<ol style="text-align: justify;">
<li><span style="font-family: "arial" , "helvetica" , sans-serif;"><b>MACD</b>: The 12-period exponential moving average (EMA) minus the 
        26-period EMA. </span></li>
<li><span style="font-family: "arial" , "helvetica" , sans-serif;"><b>MACD Signal Line</b>: A 9-period EMA of the MACD.<b> </b></span></li>
<li><span style="font-family: "arial" , "helvetica" , sans-serif;"><b>MACD Histogram</b>: The MACD minus the MACD Signal Line.  </span></li>
</ol>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"> With an MACD chart, you will usually see three numbers that are used for its settings.<br />
</span></div>
<ul style="text-align: justify;">
<li><span style="font-family: "arial" , "helvetica" , sans-serif;">The first is the number of periods that is used to calculate the faster moving average.</span></li>
<li><span style="font-family: "arial" , "helvetica" , sans-serif;">The second is the number of periods that is used in the slower moving average.</span></li>
<li><span style="font-family: "arial" , "helvetica" , sans-serif;">And
 the third is the number of bars that is used to calculate the moving 
average of the difference between the faster and slower moving averages.
 </span></li>
</ul>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">For example, if you were to see "12, 26, 9" as the MACD 
parameters (which is usually the default setting for most charting 
packages), this is how you would interpret it:<br />
</span></div>
<ul style="text-align: justify;">
<li><span style="font-family: "arial" , "helvetica" , sans-serif;">The 12 represents the previous 12 bars of the faster moving average.</span></li>
<li><span style="font-family: "arial" , "helvetica" , sans-serif;">The 26 represents the previous 26 bars of the slower moving average.</span></li>
<li><span style="font-family: "arial" , "helvetica" , sans-serif;">The
 9 represents the previous 9 bars of the difference between the two 
moving averages.  This is plotted by vertical lines called a histogram 
(the green lines in the chart above).</span></li>
</ul>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">There is a common 
misconception when it comes to the lines of the MACD.  The two lines 
that are drawn are NOT moving averages of the price.  Instead, they are 
the moving averages of the <b>DIFFERENCE</b> between two moving averages.

</span><span style="font-family: "arial" , "helvetica" , sans-serif;"><br />
In our example above, the faster moving average is the moving average of
 the difference between the 12 and 26-period moving averages. The slower
 moving average plots the average of the previous MACD line. Once again,
 from our example above, this would be a 9-period moving average.  </span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">

</span><span style="font-family: "arial" , "helvetica" , sans-serif;">This means that we are taking the average of the last 9 periods of 
the faster MACD line and plotting it as our slower moving average. This 
smoothens out the original line even more, which gives us a more 
accurate line.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">

</span><span style="font-family: "arial" , "helvetica" , sans-serif;">The histogram simply plots the difference between the fast and slow 
moving average.  If you look at our original chart, you can see that, as
 the two moving averages separate, the histogram gets bigger. </span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">

</span><span style="font-family: "arial" , "helvetica" , sans-serif;">This is called divergence because the faster moving average is "diverging" or moving away from the slower moving average.</span></div>
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</span><span style="font-family: "arial" , "helvetica" , sans-serif;">As the moving averages get closer to each other, the histogram gets 
smaller.  This is called convergence because the faster moving average 
is "converging" or getting closer to the slower moving average. </span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">

</span><span style="font-family: "arial" , "helvetica" , sans-serif;">And that, my friend, is how you get the name, <b>M</b>oving <b>A</b>verage <b>C</b>onvergence <b>D</b>ivergence!  Whew, we need to crack our knuckles after that one!</span></div>
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</span><span style="font-family: "arial" , "helvetica" , sans-serif;">Ok, so now you know what MACD does. Now we'll show you what MACD can do for YOU.</span></div>
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<h1>
<span style="font-family: "arial" , "helvetica" , sans-serif;">MACD Moving Average Crossovers</span></h1>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-weight: normal;"> The primary method of interpreting the MACD is with moving average 
crossovers. When the shorter-term 12-period exponential moving average (EMA) 
crosses over the longer-term 26-period EMA a buy signal is generated; this is 
seen on the chart below with the two 
purple lines.</span></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-weight: normal;"> </span></span> </div>
<span style="font-family: "arial" , "helvetica" , sans-serif;">Remember that the MACD line (the blue line) is created from the 12-period and 
26-period EMA. Consequently: </span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;">
    </span><br />
<ol>
<li><span style="font-family: "arial" , "helvetica" , sans-serif;">When the shorter-term 12-period EMA crosses above the longer-term 26-period 
        EMA, the MACD line crosses above the Zero line. </span></li>
<li><span style="font-family: "arial" , "helvetica" , sans-serif;">When the 12-period EMA crosses below the 26-period EMA, the MACD line 
        crosses below the Zero line.</span> </li>
</ol>
<h2 class="buy">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: lime;">Moving Average Crossover Buy Signal</span></span></h2>
<span style="font-family: Arial,Helvetica,sans-serif;">A buy signal is generated when the MACD (blue line) crosses above the zero 
      line.</span><br />
<h2 class="sell">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: red;">Moving Average Crossover Sell Signal</span></span></h2>
<span style="font-family: Arial,Helvetica,sans-serif;">When the MACD crosses below the zero line, then a sell signal is 
      generated.</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">The prior buy and sell signals get a person into a trade later in the move of 
      a stock or future. A more common buy and sell signal is shown in the graph below</span><br />
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<h2 style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">Most Common MACD Buy and Sell Signals</span></h2>
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      </span></div>
<h2 class="buy" style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="color: lime;">MACD Buy Signal</span></span></h2>
<div style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">
      </span><span style="font-family: "arial" , "helvetica" , sans-serif;">A buy signal is generated when the MACD (blue line) crosses above the MACD 
        Signal Line (red line).</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">
      </span></div>
<h2 class="sell" style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="color: red;">MACD Sell Signal</span></span></h2>
<div style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">
      </span><span style="font-family: "arial" , "helvetica" , sans-serif;">Similarly, when the MACD crosses below the MACD Signal Line a sell signal is 
        generated.</span></div>
<div style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">
    </span><span style="font-family: "arial" , "helvetica" , sans-serif;">The MACD moving average crossover is one of many ways to interpret the MACD 
        technical indicator. Using the MACD histogram and MACD divergence warnings are 
    two other important methods of using the MACD.</span></div>
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<h1 style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">MACD Histogram</span></h1>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-weight: normal;"><span style="font-size: small;">The MACD Histogram is simply the difference between the MACD line (blue line) 
and the MACD signal line (red line). The MACD histogram is illustrated in the 
chart below</span></span></span></h1>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Two important terms are derived from the MACD histogram and are illustrated 
above in the chart </span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">
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<ul style="text-align: justify;">
<li><span style="font-family: "arial" , "helvetica" , sans-serif;"><b>Convergence</b>: The MACD histogram is shrinking in height. This occurs 
        because there is a change in direction or a slowdown in the stock, future, bond, 
        or currency trend. When that occurs, the MACD line is getting closer to the MACD 
        signal line. </span></li>
<li><span style="font-family: "arial" , "helvetica" , sans-serif;"><b>Divergence</b>: The MACD histogram is increasing in height (either in the 
        positive or negative direction). This occurs because the MACD is accelerating 
        faster in the direction of the prevailing market trend. </span></li>
</ul>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">
    When a stock, future, or currency pair is moving strongly in a direction, the 
      MACD histogram will increase in height. When the MACD histogram does not 
      increase in height or begins to shrink, the market is slowing down and is a 
      warning of a possible reversal. The graph below</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The letter "T" represents when the top or peak of the MACD histogram occurs. In 
        contrast, the letter "B" shows when the bottom of the MACD histogram occurs. 
        Notice how closely the tops and bottoms of the MACD histogram are to the tops of 
    the Nasdaq 100 e-mini future. </span></div>
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      </span></div>
<h2 class="buy" style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="color: lime;">MACD Histogram Buy Signal</span></span></h2>
<div style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">
      </span><span style="font-family: "arial" , "helvetica" , sans-serif;">When the MACD histogram is below the zero line and begins to converge towards 
        the zero line.</span></div>
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      </span></div>
<h2 class="sell" style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="color: red;">MACD Histogram Sell Signal</span></span></h2>
<div style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">
      </span><span style="font-family: "arial" , "helvetica" , sans-serif;">When the MACD histogram is above the zero line and begins to converge towards 
        the zero line.</span></div>
<div style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">
      </span><span style="font-family: "arial" , "helvetica" , sans-serif;">Note: In the example above, three consecutive days of shrinking MACD 
        histogram from top or bottom served as the buy or sell signals shown with 
        arrows. This is an agressive example. One could wait until the MACD histogram 
        went to zero, but that would be the same signal as the MACD moving average 
        crossover.</span></div>
<div style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">
      </span><span style="font-family: "arial" , "helvetica" , sans-serif;">The MACD is not only good for buy and sell signals, the MACD can be used for 
        warnings of potential change in the direction of stocks, futures, and currency 
        pairs.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">

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<h1 style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">MACD Divergences</span></h1>
<div style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">

</span><span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="color: lime;"><b>Bearish divergence</b></span> occurs when a technical analysis
indicator is suggesting that a price should be going down but the price of the
stock, future, or currency pair is continuing to maintain its current uptrend.</span></div>
<div style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">

</span><span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="color: red;"><b>Bullish divergence</b></span> occurs when the indicator is indicating
that price should be bottoming and heading higher, yet the actual price action
is continuing downward.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">

</span><span style="font-family: "arial" , "helvetica" , sans-serif;">These valuable divergences can signal to get out of a long or short position
before profits erode. The following chart shows some of these divergences:</span><br />
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<h3 style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">High #1 to High #2 </span></h3>
<div style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">

</span><span style="font-family: "arial" , "helvetica" , sans-serif;">Looking at the E-mini S&P 500 future, from High #1 to High #2, the
futures contract made higher highs, which is usually viewed as bullish.
However, the MACD moving average failed to make a new high. This bearish
divergence was an early warning sign of things to come with the contract.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Low #1 to Low#2</span></h3>
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</span><span style="font-family: "arial" , "helvetica" , sans-serif;">In yet another bearish sign for the E-mini S&P 500 futures contract, the
future made higher lows from Low #1 to Low #2, which again is usually
considered positive. Nevertheless, the MACD technical indicator made a clear
lower low from Low #1 to Low #2. This bearish divergence warned of the
impending downturn of the contract <span style="mso-spacerun: yes;"> </span>and
the market as a whole.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Low #2 to Low #3</span></h3>
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</span><span style="font-family: "arial" , "helvetica" , sans-serif;">In addition to bearish and bullish divergences, the MACD can confirm price
movement as well. The E-mini S&P 500 futures contract made a substantial
lower low which was confirmed by the MACD when it made a lower low as well.</span></div>
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</span><span style="font-family: "arial" , "helvetica" , sans-serif;">As seen throughout the MACD sections, the MACD is a versatile tool giving
clear buy and sell signals and giving warnings of impending price changes.</span></div>
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(MACD) Moving Average Convergence Divergence The MACD indicator is one of the most popular technical analysis tools. MACD is an acronym ...