Moving Average Convergence/Divergence (MACD)

Indicator Type: Trend Following

Introduction:
In an attempt to determine the strength of a trend along with the direction of that trend MACD was created. Gerald Appel while with Signalert Corporation created a system that looked at two exponential moving averages and the difference between those two averages. Looking at these moving averages of the market we are able to see clear buy and sell signals. By also looking at an average of the difference in the two moving averages we are able to get a more accurate signal.

Interpretation:
Computing this indicator requires the use of exponential moving averages. Exponential moving averages are different than simple moving averages because instead of looking at only the last few days and averaging them, exponential averages look at all the prices but put more weight on the most recent data. This type of weighted average gives a smoother average price that reacts more quickly to market moves. The two averages of MACD move above and below a base line, which gives indication of the strength of the current move. This placement of the two averages in relationship to the base line is calculated by looking at the exponential moving average of the difference between the two averages. So even though the two averages may cross, the divergence or true indication of the signal is not shown until both averages cross the base line.

Keeping this in mind, an ideal buy signal is seen on a move where the shorter-term average moves above the other average and both averages cross above the base line of zero. Inversely a sell signal would be the opposite of this.

The histogram method of MACD is read as a straight line above or below the zero baseline. This line represents the difference between the moving averages. Therefore when the moving averages move above the base line they are indicating a buy, and as the difference between the averages increases the lines will get taller.

The opposite is true of a sell signal. Gecko Charts ability to display MACD in this fashion is vital because it allows you to read the strength of the current trend along with the signal to buy or sell.

Using the MACD as a histogram also allows the trader to spot divergences between the indicator and the market price. A divergence is present when the market makes a higher high than the previous high, but the MACD histogram fails to make a corresponding higher high. This is considered – in technical lore – to be a sign of weakness, and a sell signal when the MACD breaks below the lowest point in between the divergent highs.

Bullish divergence is seen in an exact opposite fashion. Assume a market has been trending downward. The market has been consistently making lower lows, as has been the MACD histogram indicator. However, eventually the MACD fails to make a lower low, corresponding to the lower low in price. If the MACD histogram line crosses above the highest high in between the divergent lows, then technical lore holds that higher prices should follow.
 

Program Options - Moving Average Convergence/Divergence

For further instruction see the numbered items corresponding with the screen shot below:

1. Display MACD Indicator:  To display the indicator in the chart window, click the check box.  You may also select the MACD Indicator from the shortcut buttons or the right-click menu in the Indicator Window.
2. Period:  To specify the number of days used in calculating the MACD simply click on the box, highlight the current number and type in a new value. Be sure to click on Ok to save your changes.
3. Style: MACD lines can be displayed as solid, dashed, or dotted lines.  Click on the drop down menu to specify the type of line style.
4. Color:  Click on the color box and a color panel will open for you to specify the new color.
5. Ruler Bar:  The Ruler Bar allows user's to create highlighted regions or horizontal lines within the indicator window.  To create a highlighted region, click at either end of the ruler bar and drag either up or down to the end point of the region.   To place a line, click in side the ruler bar and drag the line to the desired point.  (When dragging a line highlighted region, a numerical value is displayed until you release the mouse.) See screen shot below:
   
   
   Ruler Bar
    
6. Preview Window: This Window allows you to make changes and preview them before saving them.
7. Exponential Moving Average 1&2: The MACD is calculated using two exponential moving averages. To change the periods used in the formula, highlight the number value and type in the new value desired.
8. MACD Lines: The MACD is made up of 3 lines, the Bearish, the Bullish and the Trigger Line.  Each of these lines can specify the color and style.  Click on the style drop down menu and select the desired type.  To change the color of the line click on the color box and select the new color.
9. MACD Type:  Choose from two types of MACD Indicators.
   1. Standard Calculation
   2. Extra Smoothed:  This Calculation is a proprietary formula developed by Lan H. Turner, president and founder of Gecko Software, Inc., and Gecko Software's Programming staff.  This method increases the movement in the MACD Indicator and has shown to be more accurate (in Gecko Software's market testing) than the standard calculation.  Click the Extra Smoothed option to test it's accuracy for yourself!  It's relationship to the MACD is the similar to the relationship between the Fast and Slow Stochastics - so think of this indicator as the "Fast MACD".
10. Show MACD As:
    1. Histogram Graph: MACD represented as a Time Progression Bar Chart.
    2. Line Graph: MACD represented as a Lines.
11. Restore Defaults:  To bring the MACD Indicator to the Default Settings, click on the Restore Defaults button.
12. Documentation:  This section contains instructions on using the MACD Indicator.