Macd histogram strategy pdf blue line is the MACD series proper, the difference between the 12-day and 26-day EMAs of the price. The red line is the average or signal series, a 9-day EMA of the MACD series.
The bar graph shows the divergence series, the difference of those two lines. Gerald Appel in the late 1970s. These three series are: the MACD series proper, the “signal” or “average” series, and the “divergence” series which is the difference between the two. EMA of the price series. The average series is an EMA of the MACD series itself. The MACD indicator thus depends on three time parameters, namely the time constants of the three EMAs.
These parameters are usually measured in days. As true with most of the technical indicators, MACD also finds its period settings from the old days when technical analysis used to be mainly based on the daily charts. The reason was the lack of the modern trading platforms which show the changing prices every moment. 2 weeks, 1 month and one and a half week. Now when the trading weeks have only 5 days, possibilities of changing the period settings cannot be overruled. However, it is always better to stick to the period settings which are used by the majority of traders as the buying and selling decisions based on the standard settings further push the prices in that direction.
A fast EMA responds more quickly than a slow EMA to recent changes in a stock’s price. By comparing EMAs of different periods, the MACD series can indicate changes in the trend of a stock. It is claimed that the divergence series can reveal subtle shifts in the stock’s trend. Thomas Aspray added the divergence bar graph to the MACD in 1986, as a means to anticipate MACD crossovers, an indicator of important moves in the underlying security.
Over the years, elements of the MACD have become known by multiple and often over-loaded terms. As the D in MACD, “divergence” refers to the two underlying moving averages drifting apart, while “convergence” refers to the two underlying moving averages coming towards each other. Gerald Appel referred to a “divergence” as the situation where the MACD line does not conform to the price movement, e. Thomas Asprey dubbed the difference between the MACD and its signal line the “divergence” series. In practice, definition number 2 above is often preferred. Gerald Appel referred to bar graph plots of the basic MACD time series as “histogram”. In Appel’s Histogram the height of the bar corresponds to the MACD value for a particular point in time.
The difference between the MACD and its Signal line is often plotted as a bar chart and called a “histogram”. MACD estimates the derivative as if it were calculated and then filtered by the two low-pass filters in tandem, multiplied by a “gain” equal to the difference in their time constants. So, for the standard MACD filter time constants of 12 and 26 days, the MACD derivative estimate is filtered approximately by the equivalent of a low-pass EMA filter of 38 days. MACD value divided by 14.
This estimate has the additional lag of the signal filter and an additional gain factor equal to the signal filter constant. While an APO will show greater levels for higher priced securities and smaller levels for lower priced securities, a PPO calculates changes relative to price. Exponential moving averages highlight recent changes in a stock’s price. By comparing EMAs of different lengths, the MACD series gauges changes in the trend of a stock. The difference between the MACD series and its average is claimed to reveal subtle shifts in the strength and direction of a stock’s trend. It may be necessary to correlate the signals with the MACD to indicators like RSI power.