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What does "MACD" mean?From time to time, whether in the newsletter or on our hotline, you
will note references to an indicator called MACD. MACD stands for the Moving Average Convergence Divergence. You may also have seen a reference to MACDTM, which adds "Trading Method" to the end of the phrase. What is the MACD? Invented in the 1970's and perfected in the 1980's by Gerald Appel, the MACD is a system which employs two unique exponential averages, plus a third exponential average
(the "Signal" line). There are different variations of MACD, namely 'Fast', 'Medium' and 'Slow'. MACD, while it can be a worthwhile stand-alone trading system, is also an excellent indicator of market trends. Whether
you plot your data hourly or monthly, MACD can identify trends and pinpoint overbought and oversold levels. How do I interpret MACD? Buy/Sell signals: MACD buy and
sell signals are calculated by finding the difference between the two exponential averages (this is the MACD
line) and plotting this difference any spreadsheet or graphing software. You can even use old-fashioned pencil and graph paper. (Mr. Appel still uses this method himself). An exponential average is then calculated of the MACD line, giving us the
Signal line. Crossings of these two lines determine buy and sell signals. Trend Following: Another useful method way of interpreting the MACD is to plot only one line, the difference between your
exponential moving averages. This plotted line will give you a much slower, smoother interpretation of market behavior. You can plot individual stocks, mutual funds or market indices to determine levels of overbought
and oversold conditions. (For an example of this type of chart, please see our May 2000 Article of Month). Another useful way of using the MACD is to plot the
quotient of two variables and calculate the MACD of the quotient. For example, we could divide the Nasdaq Composite by the S&P 500. When you plot the resulting MACD line, a rising line tells us that the Nasdaq
market is stronger, falling the S&P 500 is stronger, etc. When plotted as an MACD, we can identify the long-term trends much easier, with the resulting chart much smoother than that of daily closing prices. From time to time we will plot MACD charts that are plotted as a percentage (as opposed to price). This means that we simply
took our MACD line (difference of two exponential averages) and divided it by the original price. This adjusts charts that cover long periods over which prices have changed significantly. This helps us compare different
historical overbought/oversold levels to levels reached in the past. (For an example of this type of chart, please see our December 1999 Article of the Month.)
How do I learn more about MACD? Where can I purchase it? Signalert Corporation sells the MACD Video (complete with workbook supplement) for $195.00. The Video is an hour and a half long, and details the
basic strategies of MACD – how and when to buy, sell and more. Learn to differentiate the 'fast', 'slow' and 'medium' MACD lines, and more. For more information on how to purchase the videotape, please click here.For a review of the MACD, published on MSN Investor, click here.If you have any questions of comments, please feel free to send us an email.
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