Moving Average Convergence Divergence (MACD) is a style of following momentum indicator that shows the relationship between two moving averages of prices.
It was developed by Gerald Appel in the late 1970s and published in his book “New Concepts In Technical Trading Systems”.
MACD calculations explained
MACD is calculated by subtracting the 26-period Exponential Moving Average from the 12-period Exponential Moving Average, usually plotted as two solid lines with a signal line based on nine periods of a Simple Moving Averages (SMA).
The default settings are 12, 26, 9.
The simple moving average acts as a dividing line that separates one part of a data series from another.
When the shorter-term moving average crosses above its longer-term counterpart, it suggests that there may be a change in trend beginning.
When the shorter-term moving average crosses below its longer-term counterpart, it suggests that there may be a change in trend coming to an end or that this existing trend may be coming to the end of its current price action.
The distance between the two EMAs makes up most of the signals, with some extra space added for aesthetics and practical purposes.
This default setting is considered more reliable than other settings because nine days are on both sides of 26 periods, which gives it broader bandwidth than 5, 10 or 20-period comparisons.
This wider bandwidth allows MACD’s signal line to stay above/below zero longer before reversing. As with any indicator, MACD should not be used by itself but with other indicators to confirm price action and potential trading signals.
MACD can be calculated in different ways depending on what data is used. The most common way is the 12-period Exponential Moving Average (EMA) – 26 period EMA, but other combinations are also available for calculation. Some of them are listed below:
12-period EMA – 9-period EMA signal line
This method gives you a faster signalling speed than standard MACD because it uses fewer periods to generate signals.
It works best with volatile stocks that have strong price movements. This setting may produce too many whipsaws; therefore, this might not suit less-experienced traders.
24-period EMA – 9-period EMA signal line
The 24-period moving average acts as your leading trend indicator, and the 9-period moving average acts as the signal line.
This method is used when you are in a well defined long term trend or do not want to take many trades per day.
26-period EMA – 12-period EMA
This combination gives you a slower signalling speed than standard MACD because it uses more periods to generate signals.
It works best with volatile stocks that have strong price movements. You may get too many whipsaws when using this setting.
Therefore, this might not be suitable for less-experienced traders.
29-period EMA – 13 period EMA signal line
This method can be challenging to learn, but once mastered, it allows highly accurate entries and exits due to its unique ability to pinpoint the start of a trend and determine where it is going.
This method gives you a slower signalling speed than standard MACD because it uses more periods to generate signals.
It is suitable for those tired of whipsaws but still need accuracy and want a signal before the price moves too far away from their entry point.
36-period EMA – 12 period EMA
This combination gives you a plodding signalling speed compared to standard MACD, which can be helpful if your trading style favours longer-term trends that spend most of their time between tight levels of support and resistance.
You may get too many whipsaws when using this setting.
Therefore, this might not be suitable for less-experienced traders.
The settings above are just some of the many possible combinations you can use when using MACD.
It’s unnecessary to understand how all the settings work before you start using it, but if you want to experiment with other settings, then go ahead and try them out.
The ways that each setting works will become apparent once you start looking at their signals and how they interact with price action in your chosen market – so enjoy!