Moving-Average-Convergence-Divergence (MACD) is a trend-following indicator. When the red line’s momentum trend changes, MACD changes.
MACD works well at finding tops and bottoms of issues that spurt then stall.
MACD is often premature and should be confirmed with trend lines and other indicators.
What is Moving Average Convergence/Divergence (MACD)
MACD is a momentum indicator. It works when prices bounce like a ball. As the ball rises, it gradually slows until it reaches its peak, and then it accelerates as it falls. MACD follows that motion. The switches occur as the ball becomes motionless at tops and bottoms. The indicator moves above/below the center as the issue reaches tops and bottoms.
How to Interpret MACD
Moving Average Convergence/Divergence (MACD) is favorable when the bars are above or approaching the centerline. MACD is unfavorable when the bars are dropping or below the centerline. MACD is computed using the price movement of the fund. The index does not affect the indicator. MACD shows when the momentum of upturn or downturn is accelerating or faltering.
MACD has three adjustable parameters that are displayed in the upper left-hand corner of the MACD chart.
These parameters are
- Slow (long) moving average
- Fast (short) moving average
- Trigger average
Setting the trigger to 1 effectively eliminates a trigger. The signals will be generated by the crossing of the slow and fast moving averages.
How should I use MACD?
Timing: There are no selection applications.
MACD gives signals that are early enough for small investors to move quickly to take advantage of slower moving professional investors.
- For GROWTH type funds with volatility similar to the S&P 500, a MACD of 90, 60, 30 is reasonable.
- For sector funds that are momentum driven, settings of 60, 30, 20 are more optimal.
- For stocks, MACD is difficult to use. Use MACD on a sector fund or stock Industry average and then applying that to a stock which has a Cor=75% of more. Be sure to use a trend line to confirm.