It was designed in order to reveal changes in the direction, strength, momentum, and duration of a trend in a stock’s price
It is a trend-following momentum indicator which shows the relationship between two moving averages of a stock’s price
As the name suggests, MACD is all about the convergence and divergence of two moving averages
Convergence occurs when the moving averages move towards each other while Divergence occurs when the moving averages move away from each other
Three main components of MACD Calculation: MACD line, Signal line, and MACD Histogram
MACD line – Calculated by subtracting 26-day EMA (Exponential Moving Average) from 12-day EMA.
Exponential Moving Average (EMA) is a type of moving average which places a greater weightage on the recent data points when compared to the past data points, making it react more significantly than a simple moving average.
Signal line – 9-day EMA of the MACD line is called the signal line
Histogram – Histogram is the graphical distance between MACD and the signal line, height used to assess how strong the price is moving in the given direction
There are three main parameters of MACD as a whole:
Look-back period of long term EMA to be formulated for MACD
Look-back period of short term EMA to be formulated for MACD
Look-back period of EMA to be formulated for signal line calculation
There are many ways MACD can be used to formulate trading strategy, out of which we will be discussing two in this post: 1. Centerline Crossover
Centerline: Zero lines above and below which the MACD line oscillates, diving the canvas in bullish and bearish regions
Bullish Crossover when MACD line moves above zero i.e. 12-EMA crosses up 26-EMA
Bearish Crossover when MACD line moves below zero i.e. 12-EMA crosses down 26-EMA
Signal Generation
BUY when MACD crosses up 0 while SELL when MACD crosses down 0
2. Signal line crossover
The signal line is 9-day EMA of MACD that means it trails the MACD thereby indicating momentum changes in convergence-divergence
Bullish crossover when MACD turns up and crosses above the signal line
Bearish crossover when MACD turns down and crosses below the signal line
Signal Generation
BUY when MACD crosses up the signal line and SELL when MACD crosses down the signal line
A lot more interesting things can be done using MACD, about which we'll be talking in the next Masterclass on MACD. STAY TUNED! ---------------------------------------------------------------------------------------- Your questions and comments are most welcome.
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Like all indicators, MACD creates both effective signals and false signals; the key to success is to understand how to judge the quality of each signal to help determine if it's likely to lead to profit or is just a head fake. I'd like to see some discussion of what factors go into assessing signal quality, how those factors are affected by the market environment, and what specifically would be the effect of making tweaks to the individual parameters. To me, that would be a true MasterClass, not just a re-telling of what is already known.
MachineMatrix
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@gooberpees, Why don't you do everyone the honour of sharing your thoughts and knowledge and then open them up for discussion, as you are so passionate on the subject.
I would be happy to be involved when you do mate :)
Mudrex
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A lot more interesting things can be done using MACD,
about which we'll be talking in the next Masterclass on MACD.
STAY TUNED!
MachineMatrix
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@Mudrex, Thank you great work as always and thanks for your contribution to the community.
I always look forward to your thoughts and content :)
nmaa0718
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Thank you for taking your time to explain MACD. Very detailed.
Mudrex
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