MACD, which stands for Moving Average Convergence / Divergence, is a technical analysis indicator created by Gerald Appel in the 1960s. It shows the difference between a fast and slow exponential moving average (EMA) of closing prices. During the 1980s MACD proved to be a valuable tool for any trader. The standard periods recommended back in the 1960s by Gerald Appel are 12 and 26 days:
MACD = EMA of price – EMA of price
A signal line (or trigger line) is then formed by smoothing this with a further EMA. The standard period for this is 9 days,
signal = EMA 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. This construction was made by Thomas Aspray in 1986. The calculation is simply
histogram = MACD − signal
The example graph above right shows all three of these together. The upper graph is the prices. The lower graph has the MACD line in blue and the signal line in red. The solid white histogram style is the difference between them.
The set of periods for the averages, often written as say 12,26,9, can be varied. Appel and others have experimented with various combinations.
Source: Charts created using TradeStation. ©TradeStation Technologies, 2001-2009. All rights reserved. www.TradeStation.com