Gerald Appel founder of the Systems and Forecasts investment newsletter in 1973, and still in publication, was the developer of the MACD. His rigorously quantitative and systematic approach to technical analysis, validated by long-term historical studies, has made it possible to develop this indicator of convergence / divergence of exponential moving averages, which after 40 years from its birth, is among the most widely used tools. used by technical analysts.
The main function of the MACD is to identify current trends by exploiting both the crossings of the moving averages from which it is made up, and by identifying the divergences that are created on the price chart compared to the graphical trend of this oscillator.
To build the MACD, three exponential moving averages are needed, that is, three lines. On our chart, however, only two lines will be displayed; in fact, a pair of the three just mentioned is used only to calculate their difference.
The first exponential moving average (EMA), the fastest, has a standard 12-period setting; the slowest one, on the other hand, is 26 periods. These two exponential moving averages are subtracted from each other to calculate the difference which will then be graphically represented by a single line called MACD.
The MACD is calculated by subtracting the long-term EMA (26 periods of smaller value) from the short-term EMA (12 periods of the largest value).
To generate signals, a third line has been introduced, called SIGNAL LINE, that is an exponential moving average, usually with 9 periods, calculated on the value of the difference between the two EMA12 and EMA26. In practice, it is an exponential moving average of the MACD line.
Riassumendo, abbiamo quindi due linee di costruzione:
MACD = EMA12 – EMA26 where EMA stands for Exponential Moving Average
SIGNAL LINE = EMA9 (MACD), that is a 9 period exponential moving average of the MACD line.
There is a third line added called ZERO LINE which identifies the upper and lower part of the oscillator and determines its positive or negative momentum area.
The standard MACD setting (12, 26, 9) is recognized by all analysts, but the versatility of this indicator allows you to change the set-up adapting it to the market (stock, sector or index) in which it is used.
It is not unusual to see the MACD calculated with faster EMAs very close to each other to have faster confirmations or, on the contrary, to evaluate a MACD with much wider differences between the EMAs to guarantee smoother and lower frequency signals. Obviously, the exponential moving average of the difference, called Signal Line, can also be modified, thus obtaining important variables that can be adapted to each financial instrument.
In 1986 Thomas Aspray developed the MACD histogram (or MACD2) by modifying the original Gerald Appel indicator.
Aspray noted that the MACD often generated signals with a decent delay to price movements, especially when dealing with longer-term charts such as weekly or monthly. The MACD2 histogram represents the difference between the MACD line value and the MACD Signal Line value (the 9-day EMA).
This difference is presented as a histogram, making the divergences easy to identify. If there is a midline crossover, then histogram creation begins. If the MACD value is above the 9-day EMA value, then the MACD histogram value will be positive (in green). Conversely, if the MACD value is lower than the 9-day EMA, the MACD histogram value will be negative (in Orange)
Further increases or decreases in the gap between the MACD and its Signal Line will be reflected in the MACD2 histogram. In case there are strong increases in the value of the MACD histogram, then these indicate that the MACD is growing faster than the trend of the 9-day average of the SIGNAL LINE, therefore the bullish trend is strengthening. If there is a sharp drop in the MACD2 histogram value, this indicates that the MACD is falling faster than the 9-day value of the SIGNAL LINE, therefore the downtrend is increasing.
The MACD or MACD2 indicator provides different types of signals:
La linea del MACD che attraversa la ZERO LINE fornisce un segnale molto importante.
The MACD line that crosses the ZERO LINE provides a very important signal.
The upper part of the ZERO LINE represents a bullish zone, while the lower one represents a bearish zone.
In particular, when the MACD line crosses the ZERO LINE from bottom to top, we have a bullish BUY signal.
Conversely, we will get a bearish SELL signal when the MACD line crosses the ZERO LINE from top to bottom.
The most important signal identified by this indicator is certainly the intersection that occurs between the MACD line and the SIGNAL LINE. This is an early signal with respect to the crossing of the ZERO LINE by the MACD line only.
When the MACD line crosses from below to above the SIGNAL LINE, we get a bullish signal; the more the distance between the crossing point and the ZERO LINE is marked, the more this signal is important.
Conversely, when the MACD line crosses from above to below the SIGNAL LINE, we get a bearish signal; also in this case, the more the distance between the crossing point and the ZERO LINE is marked, the more this signal is important.
It is also possible to draw simple trend lines on the MACD lines in order to identify important changes in the current trend.
The divergence could give false signals if it subsequently encounters a lateral market, which obviously is not predictable, so it is to be considered not sufficient if considered as the only entry or exit signal.
Spotting a divergence between the MACD and the price action becomes an even stronger signal when it confirms the cross signals between the MACD line and the SIGNAL LINE. It is even more pronounced and certain when the ZERO LINE is exceeded.
This precious indicator provides with good precision the correct timing of a possible trend inversion, but due to its construction logic it is only suitable for this without providing price target signals.
The lack of a scale of values that can indicate an overbought or oversold area does not allow to have clearly identifiable reference parameters for obtaining price targets.
It is therefore a very useful tool for identifying trends and managing the timing of income and expenses, but to be combined with the graphical analysis of the chart or with other tools such as the Bollinger Bands to research take profit levels.