The Moving Average Convergence Divergence (MACD), developed by Gerald Appel, is both an oscillator and a trend indicator. It is the difference between a fast Exponential Moving Average (EMA) and a slow Exponential Moving Average and the fast Moving Average is continually converging towards or diverging away from the slow Moving Average. A third Exponential Moving Average, or signal line, is then plotted to identify changes in trends and market sentiment.
The formula for Moving Average Convergence Divergence (MACD) is:
The MACD is a lower technical study. ProSticks uses the default parameters 12, 26, and 9 bars to calculate the MACD. A histogram of the difference between the MACD and signal line is also provided.
The MACD study can be used to identify buy and sell signals. When the MACD crosses above the signal line, it may be time for the longs to enter the market, whereas when a cross below the signal line occurs, it may be time for the shorts to enter the market.
The MACD study can also be used as an oscillator, an indicator that fluctuates above and below a zero-line, to signal overbought and oversold conditions. When both lines are below zero, it is considered an oversold condition, signalling a buying opportunity, whereas if both lines are above zero, it is considered an overbought condition, signalling a selling opportunity.
Divergence can also be identified with the MACD. A positive divergence occurs when the price is making new lows while the MACD fail to reach new lows. On the other hand, negative divergence occurs when the price is making new highs without being accompanied by new highs from the MACD.