Does Moving Average Convergence Divergence (MACD) work?
As part of a series looking at technical/momentum indicators, today we're going to look at MACD.
Developed by Gerald Appel (publisher of Systems and Forecasts) in the late seventies, the rather grand-sounding "Moving Average Convergence-Divergence (MACD) indicator" is actually one of the most commonly used momentum indicators around. It is used to spot changes in the strength, direction, momentum, and duration of a trend in a stock's price.
What is MACD?
The MACD is just the difference between a 26-day and 12-day exponential moving average of closing prices (an exponential moving average or EMA is one where more weight is given to the latest data). A 9-day EMA, called the "signal" (or "trigger") line is plotted on top of the MACD to show buy/sell opportunities.
Why is the MACD useful?
The reason that traders pay attention to varying lengths of moving averages is because they want to figure out how the short-term momentum is changing relative to the longer-term momentum. If the short-term average rises faster (slower) than the long-term average, the MACD moves upward (downward). Traders use this to suggests that the buying pressure is increasing (decreasing).
Interpretation
One of the reasons that MACD is so popular is because...