The Moving Average Convergence/Divergence (MACD) was invented by Gerald Appel sometime in the sixties and comes in various flavors, but most are based on a technique developed by McClellan (which he based on a technique developed by Haurlan). The technique is to take the difference between two exponential moving averages (EMA’s) with different periods. This produces what’s generally referred to as an oscillator. An oscillator is so named because the resulting curve swings back and forth across the zero line.
Appel’s version used the difference between a 12-day EMA and a 25-day EMA to generate his primary series. This series was plotted as a solid line. Then he took a 9-day EMA of the difference and plotted that as a dotted line. The 9-day EMA trails the primary series by just a bit, and trades are signaled whenever the solid line crosses the dotted line.
For more volatile markets, you may want to shorten the periods of the EMA’s. I seem to remember one trader that used an MACD on futures data with 7-day and 13-day for the primary series and a 5-day EMA of that for the trailing curve. I also know a fellow who runs an MACD on the adline (advancing issues minus declining issues).
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Contributed-By: Chris Lott, Jack Hershey