Technical analysis II

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8. Moving average convergence/divergence (MACD)

MACD was devised in the 1960s by a technical analyst called Gerald Appel to show trend changes by comparing the convergence and divergence of two moving averages. The technique uses two lines:

1. Fast MACD Line
   • Calculate a short term moving average (say, 12 days) for a share (or other financial instrument)
   • Calculate a longer term moving average (say, 25 days) for the same share
   • Subtract one set of figures from the other to get a third set of figures (the MACD line) and normalise the figures.
2. Signal Line

   This is an exponential moving average of the Fast MACD line. (Don't worry about how it's calculated for the moment.)

   Interpretation:

   • Consider buying when the Fast MACD line moves above the Signal line when both have negative values
   • Consider selling when the Fast MACD line moves below the Signal line when both have positive values

   The further the MACD moves from the benchmark zero line, the stronger the trend is likely to be.

MACD charts are easily produced on the better technical analysis software programmes, so you don't have to worry too much about the theory behind them. The key thing is to compare MACD charts with actual share price charts and see for yourself how well, if you'd followed the signals, things would have turned out.

1. Average share prices 2. Moving averages 3. Weighted moving averages 4. Where to plot moving averages 5. Interpreting moving averages - the basics 6. Classic interpretation of moving averages 7. Combining short and long term moving averages 8. Moving average convergence/divergence (MACD) 9. Reversal patterns 10. Head and shoulders top 11. Head and shoulders bottom 12. Double top 13. Double bottom 14. Rounding tops and bottoms 15. Broadening formations 16. Wedge formations 17. The momentum indicator 18. The momentum oscillator 19. Rate of change indicator 20. Price minus average 21. Relative strength indicator 22. Conclusion

• Martin Pring's Introduction to Technical Analysis
• Technical Analysis Plain and Simple
• Technical Analysis of the Financial Markets