MACD is one of the widely used technical indicators. It is one of those indicators designed to reduce the noises of the signals.

MACD (Moving Average Convergence/Divergence) is one of the simplest and most reliable indicators available. It is a technical analysis indicator created to show the difference between a fast and slow exponential moving average (EMA) of closing prices.

The most popular formula for the "standard" MACD is the difference between a security's 26-day and 12-day Exponential Moving Averages (EMAs).

MACD=EMA (12) of price-EMA (26) of price

A positive MACD indicates that the 12-day EMA is trading above the 26-day EMA. And a negative MACD indicates that the 12-day EMA is trading below the 26-day EMA. If MACD is positive and rising, then the gap between the 12-day EMA and the 26-day EMA is widening, and vice versa.

A signal line (or trigger line) is then formed by smoothing MACD with a further EMA. The standard period for this is 9 days.

Signal =EMA (9) of MACD

The difference between the MACD and the signal line is often calculated and shown not as a line, but a solid block histogram style.

Histogram=MACD-signal

MACD is a trend following indicator, and is designed to identify trend changes. In a MACD strategy, three types of trading signals are generated:

• Divergence between price and histogram, or between MACD line and price
• MACD line crossing 0
• MACD line crossing the signal line

Further we develop bullish signals and bearish signals based on the above-mentioned trading signals.

MACD bullish signals:

• Positive Divergence

A Positive Divergence occurs when MACD begins to advance and the security is still in a downtrend and makes a lower reaction low. This is interpreted as bullish, suggesting the downtrend may be nearly over. Positive Divergences are probably the least common of the three signals, but are usually the most reliable, and lead to the biggest moves.

• Bullish Centerline Crossover

A Bullish Centerline Crossover occurs when MACD moves above the zero line and into positive territory. This is a clear indication that momentum has changed from negative to positive or from bearish to bullish.

• Bullish Moving Average Crossover

A Bullish Moving Average Crossover occurs when MACD moves above its 9-day EMA, or trigger line. It is probably the most common signal and as such is the least reliable. These crossovers may lead to whipsaws and false signals without being used with other technical analysis tools.

Similarly, we have MACD bearish signals:

• Negative Divergence

  A Negative Divergence occurs when MACD starts to drop but the security prices make a new rally high.
  

• Bearish Centerline Crossover

  A Bearish Centerline Crossover occurs when MACD moves below the zero line and becomes negative.
  

• Bearish Moving Average Crossover

  A Bearish Moving Average Crossover occurs when MACD drops below its 9-day EMA, or trigger line.

Even though some traders may use only one of the above signals to form a buy or a sell signal, using a combination can generate more robust signals.

It is preferable to look at a MACD on a weekly scale before looking at a daily scale to avoid making short term trades against the direction of the intermediate trend. And it's generally not recommended for use in ranging market conditions.

The following is a list of other possible applications of Moving Averages (MAs).

• Moving Averages Strategy for Equity: The standard MA strategy for various stock market indices or securities.
  
• Moving Average Short: Use Moving Average as a downside protection by shorting another security similar or related to the underlying security. Another similar strategy is the Momentum Hedge, which utilizes MAs are the downside protection for a momentum based portfolio,
• Moving Average With Signal: Use MAs from another security as the trading signal for the underlying security.
• Moving Average With Two Signals: Instead of merely using one signal, use multiple signals (two signals) to make sure the trends are confirmed.

See Also

• "Trend Indicators: Moving Average Convergence Divergence (MACD) and MA,",  www.alpari.co.uk.
  
• "MACD", Wikipedia. .
• "Moving Average Convergence/Divergence (MACD)",  stockcharts.com