What is the exponential smoothing moving average (MACD)?
Key points
The exponential smoothing moving average is a simple and effective indicator of momentum that shows the relationship between the two moving price averages.
The cross relationship between DIF line and DEA line can reflect the transaction signal to some extent.
The MACD index can be applied to the analysis of crossover and deviation signals.
Learn about MACD
The exponential smoothing moving average (MACD) is a momentum index for trend tracking proposed by Geral Appel in 1979. MACD usually consists of three components. The MACD line is the fast exponential moving average (usually 12 days) minus the slow exponential moving average (usually 26 days), which is generally called DIF. The second line is the signal line, which is the exponential moving average of DIF (usually 9 days), commonly known as DEA. The last component is the MACD histogram, whose value is the difference between DIF and DEA. However, the time value of MACD index can also be adjusted according to traders' preferences and trading categories.
The underlying logic of the DIF is that the moving average of the short-term index reflects current price movements, while the long-term EMA reflects earlier price movements. Therefore, if there is a large gap between the two EMA, then the market will have an upward or downward trend. The MACD histogram oscillates near the zero line, indicating the intensity of the trend.
How to apply MACD
Cross recognition
The intersection between the DIF line and the DEA line can indicate the trend of price change.
In MACD analysis, this may be a bullish signal when the DIF line crosses from below to above the DEA line.
When the DIF line crosses from above to below the DEA line, this may be a bearish signal.
Deviate from
When the DIF line and the price change have the opposite trend, there will be a deviation signal. The deviation signal indicates that the trend may be reversed in MACD analysis.
For example, when the DIF line has an upward trend but lower prices, a bullish divergence signal appears, which indicates that prices may rise.
On the contrary, when the DIF line has a downward trend but higher prices, a bearish divergence signal is generated, which indicates that prices may fall.
Limitations of MACD
The MACD index is very simple and practical, but it still has some disadvantages. Because the moving average measures the changes in the price of a stock in the previous period of time, for short-term large price changes, MACD will not immediately produce a signal, there will be a certain lag.
Therefore, when using MACD index to make signal judgment and transaction judgment, we should also combine the situation of other indicators and make a comprehensive judgment.