What is the Exponentially Smoothed Moving Average of Difference and Dissimilarity (MACD)?

Key Takeaways

The Exponential Smoothing Divergence Moving Average is a simple but effective momentum indicator that shows the relationship between two moving price averages.

The crossover relationship between the DIF and DEA lines can reflect trading signals to some extent.

The MACD indicator can be applied to crossover and divergence signal analysis.

Understanding the MACD

The Exponential Smoothed Moving Average of Difference and Divergence (MACD) is a trend-following momentum indicator introduced by Geral Appel in 1979.The MACD typically consists of three components.The MACD line is the fast exponential moving average (generally taken as 12 days) minus the slow exponential moving average (generally taken as 26 days), commonly referred to as the difference in values (DIF). The second line is the signal line, which is the exponential moving average of the DIF (generally taken as 9 days), generally referred to as the DEA.The last component is the MACD histogram, whose value is the difference between the DIF and the DEA. However, the temporal value of the MACD indicator can also be adjusted according to the trader’s preferences and trading categories.

The logic inherent in DIF is that the short-term Exponential Moving Average reflects the current price action, while the long-term EMA reflects an earlier price action. Therefore, if there is a large gap between these two EMAs, then the market is trending up or down. And the MACD histogram oscillates around the zero line, indicating the strength of the trend.

How to apply MACD

Crossover Recognition

A crossover between the DIF and DEA lines can indicate a trend in price change.

In MACD analysis, when the DIF line crosses above the DEA line from below, this can be a bullish signal.

When the DIF line crosses from above to below the DEA line, this may be a bearish signal.

Divergence

A divergence signal occurs when the DIF line and the price change have opposite trends. Divergence signals in MACD analysis indicate that the trend may be reversing.

For example, when the DIF line is trending upward but a lower price is seen, a bullish divergence signal appears, which signals that the price may rise.

On the contrary, when the DIF line is trending downwards but a higher price is seen, a bearish divergence signal is generated, which indicates that the price may fall.

Limitations of MACD

The MACD indicator is very simple and practical, but it still has some drawbacks. Since moving averages measure the change in a stock’s price over a previous period of time, the MACD does not immediately generate signals for large short-term price changes, which can have a lag.

Therefore, when using the MACD indicator to do signal judgment and trading judgment, should also be combined with other indicators, comprehensive judgment.

Leave a Reply

Your email address will not be published. Required fields are marked *