What Is MACD?

What Is MACD?

Introduction of MACD

The MACD indicator is used to identify the medium and long-term trend of stock price, which can help investors determine the price trend. It is created by Gerald Appel since 1979, it has used for more than 40 years. It is also called as exponential moving average.

MACD indicator mainly identify the trend of bullish and bearish through the convergence and divergence of two lines. The two lines are DIFF (fast line), usually as the blue line; DEA (slow line), usually as the red line and the column obtained by subtracting the two lines (MACD)

The default parameters for MACD are 26,12,9

• 26 is adjustable for longer timeframes
• 12 is adjustable for shorter timeframes
• 9 is the exponential smoothing of the MACD

The formula and feature of MACD

Although MACD is quite famous, but if you don’t have an in-depth understanding on it, you must be afraid to use it in actual transactions. So let’s dig a little deeper into this metric now! First of all, let’s introduce the indicator that will be used in the calculation later: EMA.

EMA stands for Exponential Moving Average, is a type of MA that places a greater weight and significance on the most recent data. It emphasizes the impact of time on price (EMA gives a higher weight to recent prices). EMA reacts quicker to price changes than MA.

Formula
Today’s EMA =(Today’s closing price -EMA of the previous day)/N+EMA of the previous day

The calculation method of DIFF (fast line) is as follows (take the daily chart as an example):

First, calculate EMA (12) and EMA (26)
EMA(12)= EMA of the previous day(12)×11/13+Today’s closing price×2/13
EMA(26)= EMA of the previous day (26)×25/27+ Today’s closing price×2/27

Then subtract the two to get DIFF
DIFF= EMA(12)－Today’s EMA (26)

Next, calculate DEA (slow line) and MACD (column)
DEA is calculated as follows:
Today’s DEA(MACD)= DEA of the previous day×8/10+DIF×2/10

After getting DIFF and DEA, subtract the two to get MACD
MACD = (DIF-DEA)×2 MACD

MACD is a medium to long term indicator. The response of MACD is quite slow because the parameters used are large, it is difficult to use in short-term fluctuations in the market. However, due to the long-term of the parameters, the accuracy is high and the long-term trend can be identified. As for how to apply the MACD indicator to the market? We will introduce it to you in the next chapter.

Risk Reminder

• Most of the time, the market will still be affected by market news and will not follow the established pattern.
• Investors can match other technical indicators to improve trading winning rate
• The most important for investment is set ready the profit and stop loss before entering the market
• Once the stop loss is broken, you must keep your promise and leave the market to protect your capital

See more:
What Is Stochastic Oscillator(KD)
How To Use KD To Determine Buying And Selling Signals?
How to identify the bullish and bearish trend by using MACD?

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