This indicator uses three
exponential moving averages, a short or fast average, a long or slow
average and an exponential average of their difference, the last being
used as a signal or trigger line. To fully understand the basics of MACD
you must first understand simple moving averages. The Moving Average
Convergence/Divergence indicator measures the intensity of public
sentiment and is considered by Gerald Appel, its developer, to be a very
good indicator signaling market entry points after a sharp decline. This
indicator reveal overbought and oversold conditions and generates signals
that predict trend or price reversals. It provides a sensitive measurement
of the intensity of public sentiment and can be applied to the stock
market, to individual stocks or to mutual funds. In some instances, it can
provide advance warning of reversals allowing you to buy into weakness and
sell into strength.
The Moving Average
Convergence/Divergence indicator (MACD) is calculated by subtracting the
value of 26-day exponential moving average from a 12-day exponential
moving average. A 9-day exponential moving average (the "signal line") is
automatically displayed on top of the MACD indicator line.
The basic MACD trading rule
is to sell when the MACD falls below its 9-day signal line. Similarly, a
buy signal occurs when the MACD rises above its signal line.
