What is the MACD indicator?
The MACD is one of the most powerful trend following and momentum indicator. The MACD is a
commonly used technical analysis indicator and the acronym stands for Moving Average Convergence Divergence.
To put it simply, any trend following indicator helps you to determine the overall direction of the market, be it uptrend (bullish) or downtrend (bearish). While a momentum indicator seeks to determine the speed and strength of a trend. Put them together and you have the perfect combination for a trend following strategy.
A picture is worth a thousand words, so here is how the classical MACD indicator looks like on a chart:
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| MACD Indicator from Oanda |
The MACD can provide earlier indication that an OLD trend is about to end and a NEW trend is
about to start. The MACD manipulates its moving averages in a rather clever way and can signal
changes in trend much closer to when they actually occur.
Please have a look at the chart example below to see the power of the MACD indicator.
Please have a look at the chart example below to see the power of the MACD indicator.
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| MACD Crossover Examples |
So, how does it work?
Well, the MACD’s moving averages and histograms (see chart below) are derived from the price
chart. They are calculated using a formula which adds greater weight to the most recent price
data.
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| MACD's Moving Averages |
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