MACD (Moving Average Convergence Divergence)

By mosesbet · Filed Under Spread Betting Comments Off on MACD (Moving Average Convergence Divergence) 

MACD Chart of NASDAQ Daily 100

When I first got into spread betting the MACD indicator was one of the most confusing things I learned.  The MACD indicator provides a great way of finding newly emerging trends in the market.  It is extremely similar to using multiple moving averages to find future price movements.

How to Calculate the MACD?

A MACD chart is first calculated by inputting three numbers:

  • The first is the number of periods (data points) used to calculate the fast moving average.
  • The second it the number of periods used to calculate the slow moving average.
  • The third is the number of bars used to calculate the moving average of the difference between the slower and the faster moving averages.

The default setting for MACD indicators at sites such as Capital Spreads and IG Index is 12, 2 and 9.

In other words, the faster moving average uses the last 12 data points, the slower moving average uses the last 26 data points, and the 9 represents the previous nine bars of the difference between the two moving averages (this information is represented in a histogram under the chart).

What does the MACD Chart Show?

First of all, the two lines on the MACD chart are NOT the two moving averages.  They are actually the moving averages of the difference between the original two moving averages.

The red line represents the faster moving average of the difference between the fast and slower moving average.  The blue line plots the slower moving average of the previous MACD line.  If we use 9 periods then this means the blue line is showing the moving average of the last 9 points of the red MACD line.  This basically smoothens out the red line and makes it easier to spot long term patterns.

The histogram underneath the chart plots the size of the different between the two MACD lines.  As the gap between the red and blue MACD lines increases, the histogram becomes bigger. This is called “divergence” because the faster moving average (red MACD) is diverging away from the slower moving average (blue MACD) which indicates a pattern change.

In contrast, “convergence” occurs as the two lines squeeze closer together, hence the name “Moving Average Convergence Divergence” or MACD for short.

By studying the MACD chart we can spot future price patterns.  It works just like when we used multiple moving averages: when the faster red line crosses the slower blue line then it indicates a future trend.  If the red line crosses above the blue line then it shows the price will increases, where as if it crosses below the blue line it usually means the price will decrease.

 

 

 

 

 

 

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