The MACD is a indicator
developed by Gerald Appel based on two moving averages of price
(close). This is a trend-following momentum oscillator. The MACD is
calculated by taking the difference between two moving averages long
and shorter exponential moving averages (EMA). These Type of the
exponential averages are used because they show more quickly to
changes in price, A “signal” or trigger line is also used, which
is the nine-period exponential moving average of the MACD line. Below
there is the MACD formula.
MACD = EMA1 – EMA2
Where:
MACD = Moving Average
Convergence/Divergence Value
EMA1 = Current value of
the first exponential moving average (using shorter period)
EMA2 = Current value of
the second exponential moving average (using longer period)
Exponential Percentage Moving Averages:
A weighted moving
average calculated by taking a percentage of today’s price and
applying it to the previous period’s moving average. The percentage
is determined by the investor:
EMA = (Today’s close ×
Exp %) + [(Previous period EMA) × (1 – Exp %)]
Where: Exp % = The chosen
exponential percentage
Signal Line:
SL = Previous period
MACD + Exp % (MACD – Previous period MACD)
Where:
Exp % = The chosen
exponential percentage for the signal line.
When the indicator is
plotted on a chart, including the MACD line and the signal line, the
most important aspect is the interaction between the two lines, as
well as their positions relative to the equilibrium, or zero, line.
When the MACD is above the zero line, it indicates that the
shorter-period moving average is above the longerperiod moving
average, which in turn indicates that the market is bullish on this
security or index. More accurately, current expectations are more
bullish than they were previously—demand is increasing. When the
MACD falls below the zero line, the shorter period moving average is
less than the longer-period moving average, indicating that demand is
more bearish than it was in the past.
There are three ways for
trade with MACD: Crossovers, OVERBOUGHT/ OVERSOLD , Divergence.
Trading with Crossovers MACD
Crossovers are probably
the most popular use of MACDs: a sell signal is generated when the
MACD crosses below the signal line, and a buy signal is generated
when the MACD crosses above the signal line. In addition, the
locations of these crossovers in relation to the zero line are
helpful in determining buy and sell points. Bullish signals are more
significant when the crossing of the MACD line over the signal line
takes place below the zero line. Confirmation takes place when both
lines cross above the zero line. Using the MACD in this way makes it
a lagging indicator. Just like moving averages—which are also
lagging indicators—the MACD works best in strong trending markets.
Both the MACD and moving averages are intended to keep you on the
“right” side of the market (on the long side during uptrends and
on the short side or out of the market altogether during downtrends),
meaning you buy and sell late. While you may enter a trade after the
beginning of a trend and exit before the trend comes to an end, these
indicators are intended to reduce your risk. Figure 1 shows the buy
and sell signals generated for NZD/USD by the crossovers of the MACD
line and the signal line. Over the period from June October 2008 to
to November 2015, Figure 1 highlights the strengths and shortcomings
of using MACD crossovers in a trading system. Note that the MACD
works very well in strongly trending markets, because it is a
trendfollowing indicator. When was in a period of “choppy”
trading, the MACD generated trades in losses,
Trading with OVERBOUGHT/ OVERSOLD MACD
Another use for the MACD
is to determine when a given security or index is either overbought
or oversold. An overbought condition may exist when the price has
experienced a significant upward move. At some point you expect that
the price might fall and return to some more “normal” level.
Likewise, when the price has seen an extended downward movement, an
oversold condition may exist. At some point the price may be expected
to rise to some normal level. A security or index may be overbought
when you see the MACD rise significantly. During this period, the
shorter moving average used in the MACD calculation is rising faster
than the longer moving average. This is an indication that the price
is overextending itself and, at some point, may reverse its course.
When using the MACD to identify periods when a security or index is
overbought or oversold, the best buy signals come when the MACD line
and the signal line are below the zero line—the security or index
may be oversold. Sell signals are generated when the lines are above
the zero, where they may indicate an overbought condition. Unlike
other oscillating indicators such as the RSI (relative strength
index), there is no pre-determined overbought or oversold condition.
High and low MACD levels are relative, depending on the security or
index you are examining. You may need to study the behavior of the
MACD over time before you can determine when the price is overbought
or oversold. Looking at the MACD behavior over an extended period of
time, you may be able to discern patterns where the MACD may rise or
fall to relatively similar levels, at which point the price will fall
or rise, respectively— and with it the MACD lines. You should also
be aware that over bought and oversold levels need not be symmetrical
for a given security or index (in other words, oversold levels can be
higher relative to overbought levels and vice versa). Although the
MACD is a lagging indicator when trading on the crossovers, it is
more of a leading indicator when it is used to highlight possible
overbought or oversold conditions. A leading indicator is useful
because it alerts you to what prices may do in the future. Leading
indicators offer the potential of greater rewards—getting in on the
ground floor—while exposing you to greater risk—the possibility
of the expected move taking place farther off or never taking place
at all. There is the assumption that when a security appears to be
oversold, its price will rise; conversely, there is the expectation
that a price that is overextended or overbought will fall. The
setting of this trading method is discretionary but is have a good
profitbility. In the first example 4H chart NZD/USD possible trades
with OVERBOUGHT/ OVERSOLD MACD method. Level 0.0028 and -0.0028.
In second example chart
level 0.0018 and -0.0018.
Trading
with divergence MACD
Divergence
is one of the best-known types of non confirmation. A divergence is a
separation between price and indicator that warns of a possible
short- to intermediate-term change of trend. A bullish divergence
arises during a down move when price makes either a lower low or a
double bottom but the indicator makes a higher low or a double
bottom. A bearish divergence occurs during an up move when price
makes either a higher high or a double top and the indicator makes a
lower high or a double top. divergences can occur at price tops or
bottoms and also at price corrections.
corrections.
The chart of NZD/USD in Figure shows both a bearish and a bullish
divergence. We have add also two moving averages for to confirm the
divergence and to entry in the market.
*Moving
Average linear Weighted 7 period open.
*Moving
Average linear Weighted 7 period close.
Buy
Bullish
Divergence confirmed by MA close > MA open.
Sell
Bearish
Divergence confirmed by MA close < MA open.
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