MACD
Momentum
Moving Average Convergence Divergence (Gerald Appel): the difference between a fast and a slow moving average. The workhorse indicator of technical analysis.
Construction & calculation
- MACD line = EMA(12) of the closing price minus EMA(26).
- Signal line = EMA(9) of that MACD line.
- Histogram = MACD line minus signal line. The histogram is what the scanner reads.
MACD = EMA(12) - EMA(26)
Signal = EMA(9) of MACD
Histogram = MACD - Signal
Interpretation
- Histogram flips from negative to positive = the MACD line crosses above the signal line: buy signal.
- MACD above zero = the short term is stronger than the long term: the trend is up. Below zero: the reverse.
- Shrinking histogram bars within a trend = momentum is fading, even though the price is still rising. Often an early warning.
- Divergence between price and the MACD line is one of the most reliable reversal signals.
How the signal works in this scanner
Buy signal (green)The MACD histogram moves from negative to zero or positive (the MACD line crosses the signal line from below).
Sell signal (red)The histogram moves from positive to zero or negative.
Watch-outs & pitfalls
- In a sideways market the MACD crosses very often. Each of those crossings looks nice on the chart in hindsight, but in practice generates transaction costs.
- A crossing far from the zero line (deep in oversold territory) is usually more reliable than a crossing that happens right on the zero line.
- Requires at least 35 trading days.